Kellogg Brown & Root Services, Inc. v. United States

United States Court of Appeals

for the Federal Circuit

______________________

KELLOGG BROWN & ROOT SERVICES, INC.,

Plaintiff-Appellant,

v.

UNITED STATES,

Defendant-Cross Appellant.

______________________

2012-5106, -5115

______________________

Appeal from the United States Court of Federal

Claims in No. 09-CV-351, Judge Christine O.C. Miller.

______________________

Decided: September 5, 2013

______________________

JOHN P. ELWOOD, Vinson & Elkin, LLP, of Washing-

ton, DC, argued for plaintiff-appellant. With him on the

brief were ERIC A. WHITE, TIRZAH S. LOLLAR and CRAIG D.

MARGOLIS.

J. REID PROUTY, Senior Trial Counsel, Commercial

Litigation Branch, Civil Division, United States Depart-

ment of Justice, of Washington, DC, argued for defendant-

cross appellant. With him on the brief were STUART F.

DELERY, Acting Assistant Attorney General, JEANNE E.

DAVIDSON, Director, and ALEX P. HONTOS, Trial Attorney.

2 KELLOGG BROWN & ROOT SERVICES v. US

DANIEL P. GRAHAM, Wiley Rein LLP, of Washington,

DC, for amici curiae. With him on the brief were NICOLE

J. OWREN-WIEST and BRIAN G. WALSH.

______________________

Before NEWMAN, LOURIE, and WALLACH, Circuit Judges.

Opinion for the court filed by Circuit Judge WALLACH.

Opinion concurring-in-part, dissenting-in-part filed by

Circuit Judge NEWMAN.

WALLACH, Circuit Judge.

Before the March 2003 invasion of Iraq, Kellogg

Brown & Root Services, Inc. (“KBR”) entered into multiple

contracts with the United States Army for the provision of

dining facility (“DFAC”) services in Iraq. The contract at

issue in this case was for DFAC services at Camp Ana-

conda (“Anaconda”), one of the largest United States

military bases in Iraq at the time. In August 2003, KBR

subcontracted with Tamimi Global Company, Ltd.

(“Tamimi”) to provide DFAC services in Anaconda. As

troop levels increased, the Defense Contract Auditing

Agency (“DCAA”) engaged in audits of multiple DFAC

subcontracts. With respect to Anaconda, the DCAA

ultimately concluded that KBR had charged the Govern-

ment $41.1 million in unreasonable costs for services

provided from July 2004 to December 2004 and declined

to pay that amount to KBR.

KBR sued in the United States Court of Federal

Claims, alleging the Government unreasonably withheld

the suspended $41.1 million. The Government brought

multiple counterclaims, including a claim under the Anti-

Kickback Act (“AKA”). The Court of Federal Claims held

that KBR was entitled to $11,460,940.31 in reasonable

costs. The court dismissed the majority of the Govern-

ment’s counterclaims, but awarded $38,000.00 to the

Government on its AKA claim.

KELLOGG BROWN & ROOT SERVICES, v. US 3

KBR appeals the Court of Federal Claims’s calcula-

tion of reasonable costs, and the Government cross-

appeals the court’s decision with respect to its counter-

claims.

Because the Court of Federal Claims did not clearly

err in its calculations, we affirm its determination of cost

reasonableness of the contract at issue. Additionally, we

affirm the dismissal of the Government’s Special Plea in

Fraud and False Claims Act claims and the denial of the

Government’s common-law fraud claim. However, be-

cause the Court of Federal Claims improperly calculated

KBR’s base fee and erred when it determined that the

actions of KBR’s employees should not be imputed to KBR

for purposes of the Government’s AKA claim, those claims

are reversed and remanded for further proceedings.

BACKGROUND

1. LOGCAP III and Master Agreements

On December 14, 2001, the Army awarded the Army

Logistics Civil Augmentation Program (“LOGCAP”)

Contract No. DAAA09-02-D-0007 (“LOGCAP III”) to

Brown & Root Services, which was then novated and

transferred to KBR on August 1, 2003. 1 Kellogg Brown &

Root Servs. v. United States, 103 Fed. Cl. 714, 716 (2012)

(“KBR II”). This contract required KBR to implement

logistics support services for the Army in Kuwait and Iraq

before and during Operation Iraqi Freedom pursuant to

1 Unless otherwise noted, the Background section is

summarized from the findings of fact made by the Court

of Federal Claims in Kellogg Brown & Root Services v.

United States, 103 Fed. Cl. 714, 716–49 (Fed. Cl. 2012)

(“KBR II”). For a thorough background of this case, see

KBR II, 103 Fed. Cl. at 716–49; Kellogg Brown & Root

Servs. v. United States, 99 Fed. Cl. 488, 490–94 (Fed. Cl.

2011) (“KBR I”).

4 KELLOGG BROWN & ROOT SERVICES v. US

task orders issued under the contract. The compensation

arrangement under LOGCAP III was a cost-plus-award-

fee agreement that incorporated the provisions of Federal

Acquisition Regulation (“FAR”) § 52.216-7, whereby “the

Army would reimburse KBR for all costs that it incurred

in contract performance, including payments to subcon-

tractors, along with a fee determined by subcontract

costs.” Id.

After the main contingent of ground troops began the

invasion of Iraq from Kuwait on March 20, 2003, the

Army began to focus on establishing dining facilities

throughout Iraq, requiring KBR to establish the capacity

to serve hot food to thousands of troops in a multitude of

camps, well beyond that envisioned in the contract. 2

The typical competitive bidding process KBR used to

award subcontracts was burdensome and time-consuming

in light of the Army’s rapidly increasing demands. In

June of 2003, KBR personnel began to create an alterna-

tive system of “master agreements.” This allowed KBR to

establish agreements with certain subcontractors before

an Army directive was issued and abbreviate the proce-

dural process of procuring subcontractors, thus enabling

KBR to perform more quickly. The board deciding which

subcontractors should receive master agreements had six

members, including KBR’s Regional Food Service Manag-

2 The contract itself required KBR to be prepared

for a “six-month deployment of a maximum of 50,000

troops at no more than eight camps.” KBR II, 103 Fed. Cl.

at 716. However, “KBR went from supporting tens of

thousands [of troops], to supporting hundreds of thou-

sands. Although initially KBR had approximately one

month to establish over thirty DFACs in Iraq, eventually

the Army was calling for more than fifty DFAC sites.” Id.

at 717–18 (internal quotation marks and citations omit-

ted).

KELLOGG BROWN & ROOT SERVICES, v. US 5

er for Iraq and Kuwait, Terry Hall, and his Deputy,

Luther Holmes. One of the subcontractors KBR ap-

proached to enter into such a master agreement was

Tamimi. 3

2. History of Kickbacks

From April 2003 to January 2004, Mr. Hall and Mr.

Holmes received multiple kickbacks from Tamimi’s Vice

President, Shabbir Khan. KBR II, 103 Fed. Cl. at 720–23,

776.

In April 2003, Mr. Khan agreed to finance a four-day

trip that Mr. Hall took to Dubai, paying for the plane

ticket and giving Mr. Hall $10,000.00, which Mr. Hall and

Mr. Holmes split. Mr. Hall spent the first two days of his

trip conducting business, and the second two days

“hav[ing] fun.” Id. at 721 (alteration in original). Mr. Hall

took another trip in early-summer 2003 to Jordan, and

Mr. Khan again paid for the ticket and gave Mr. Hall

$3,000.00. Additionally, in either August or September of

2003, Mr. Khan gave Mr. Hall an ATM card “with a

substantial amount of money on it.” Id. at 722. Mr. Hall

used some of the money for Christmas decorations for the

dining facilities, but then spent approximately $3,500.00

on himself and handed over the card to Mr. Holmes.

Finally, Mr. Khan gave Mr. Hall $20,000.00 in cash in

January 2004. Mr. Hall had been interested in the possi-

bility of opening up a Golden Corral franchise after leav-

ing the Army, and Mr. Khan’s cash offer was for

“exploratory” research on opening this franchise. Id.

After spending approximately $7,000.00 on research for

the franchise, Mr. Hall was unable to secure adequate

3 As detailed by the Court of Federal Claims, KBR

had previously employed Tamimi, and their relationship

“was not always smooth.” KBR II, 103 Fed. Cl. at 717.

6 KELLOGG BROWN & ROOT SERVICES v. US

financing and abandoned the project. He kept the re-

mainder of Mr. Khan’s money for himself.

3. Tamimi at Camp Anaconda

The master agreements KBR formed with subcontrac-

tors eventually corresponded to various regions of Iraq,

with different subcontractors servicing specific regions.

Not long after KBR instituted its master agreement

system, the Army issued a requirement for a DFAC in

Kirkuk, Iraq, a region associated with subcontractor The

Event Source (“TES”). However, the Government later

sent a letter directing KBR to relocate this DFAC to

Camp Anaconda. Although KBR initially planned to keep

TES as the subcontractor on this particular DFAC, it

ultimately awarded Master Agreement 3 Work Release 3

(“WR 3”) to Tamimi. Mr. Hall and Mr. Holmes had

strongly advocated choosing Tamimi over TES. Id. at 723.

“WR 3 provided that KBR would pay Tamimi a fixed

per person/per day (“PPPD”) price based upon either

actual headcount of troops served at the Anaconda DFAC

or the projected headcount provided by the Army, which-

ever was greater.” Id. at 724. However, because of a

confluence of factors, Tamimi began operating DFAC

services at Anaconda before KBR had internally approved

WR 3 or generated the necessary requisitions to pay

Tamimi for its services. Id. 4

On September 4, 2003, the Army instructed KBR to

replace two of the Anaconda DFAC facilities with new,

4 A “requisition [is] a key instrument that provides

a general outline and description of work to be performed.

It provides the authorization, the signatures. It provides

[the Procurement personnel] an estimate, a rough order of

magnitude, price, cost.” KBR II, 103 Fed. Cl. at 725 (in-

ternal quotation marks and citations omitted) (alteration

in original).

KELLOGG BROWN & ROOT SERVICES, v. US 7

more permanent structures; however, KBR could not seek

reimbursement from the Army under LOGCAP III for this

work because it was in the business of providing services

and not procuring buildings. A solution was devised

where Tamimi would purchase the buildings and then

indirectly charge KBR for the buildings through its DFAC

subcontract. Id. at 725. As time elapsed, however, the

Government determined that KBR should own the facili-

ties. As the Court of Federal Claims noted, “[t]he negotia-

tions between KBR and Tamimi regarding the construc-

construction costs of these buildings played a significant

role in the present dispute.” Id.

Tamimi continued to operate the DFACs at Anaconda

without the benefit of a contract and without the neces-

sary requisitions by KBR. On November 3, 2003, howev-

er, KBR issued a material requisition, pricing six months

of DFAC services for all four Anaconda DFACs at

$111,650,000.00. After significant negotiations, exten-

sions, and machinations, WR 3 was officially sanctioned

within KBR on April 26, 2004.

4. Inquiry Into Tamimi’s Prices

Despite this approval, Tamimi’s prices submitted to

KBR for DFAC services throughout Iraq were increasing-

ly scrutinized; both the Army and the DCAA objected to

the costs submitted. Under this scrutiny, in early- to mid-

2004, KBR had begun providing brief extensions while

recompeting many of its DFAC contracts. 5 “One group of

5 “In some of those contracts, KBR was able to

secure prices that were up to 40% lower than the original

round of contracts.” KBR II, 103 Fed. Cl. at 730. Recom-

peting a contract (or a subcontract) means reengaging in

competitive bidding procedures, see, e.g., FAR § 6.101,

prior to or during contract performance, culminating in an

award of the contract to one of the bidders. In this case,

KBR, not the Army, was accepting and evaluating bids for

8 KELLOGG BROWN & ROOT SERVICES v. US

subcontracts that had been extended, yet was recognized

to need renegotiation, was Tamimi’s, including WR 3.”

KBR II, 103 Fed. Cl. at 730. DCAA had particular inter-

est in Tamimi’s subcontracts because Tamimi “was billing

. . . based on either projected or actual headcount, which-

ever was higher.” Id.

After discussions between KBR and Tamimi, the two

negotiated modifications to WR 3, with Tamimi agreeing

to a retrospective overall price reduction of

$16,560,000.00 among Tamimi’s nine subcontracts with

$4,907,319.00 to be allocated to Anaconda. 6 On August

12, 2004, after those negotiations, KBR and Tamimi

created Change Order 6 to WR 3. A number of changes

were introduced including extending Tamimi’s perfor-

mance period through September 15, 2004, implementing

the negotiated price reduction, incorporating a new con-

tract pricing structure, and agreeing to further negotia-

tions concerning the ownership of the new DFAC

facilities.

Notwithstanding those efforts, KBR internally deter-

mined to not issue payments on Tamimi’s invoices be-

cause of continued doubts as to the reasonableness of the

prices agreed to by Tamimi. 7

DFAC subcontracts through the use of competitive proce-

dures.

6 According to the Court of Federal Claims, the

negotiations were acrimonious, with multiple failed

attempts, Tamimi taking an “all or nothing” position, and

KBR stopping all payments to Tamimi to induce and

maintain negotiations. KBR II, 103 Fed. Cl. at 730.

7 The record contains testimony and internal docu-

mentation from KBR that the procurement situation at

Anaconda was, in the words of Mr. Petsche, “a mess.”

KBR II, 103 Fed. Cl. at 726.

KELLOGG BROWN & ROOT SERVICES, v. US 9

5. KBR’s Failed Self-Performance

While negotiating the above modifications with

Tamimi, KBR was also attempting to recompete the work

at Anaconda. After resisting, Tamimi eventually submit-

ted a proposal for the Anaconda DFAC services on July

31, 2004; two other vendors were also planning to submit

proposals. However, while waiting for these proposals,

“KBR was assessing whether it would be more benefi-

cial—and less costly—simply to self-perform the DFAC

work at Anaconda.” KBR II, 103 Fed. Cl. at 734. KBR

management approved the idea because it predicted self-

performance would result in savings of approximately $17

million.

KBR solicited proposals from vendors for the neces-

sary labor pool to self-perform. Difficulties quickly be-

came apparent. The necessary labor pool was not

forthcoming, in part because “certain countries were

precluding their citizens from entering Iraq.” Id. Because

of extensive subcontractor logistical problems, unrelated

to Tamimi, KBR was unable to begin self-performance

and was forced to extend Tamimi’s period of performance

until November 30, 2004, and again for a long-term

extension starting December 1, 2004. The latter exten-

sion, however, was contingent on negotiations for “(1) a

retroactive discount on prices from July through Novem-

ber 2004, and (2) a competitive price for the new period of

performance.” Id. at 735. 8

8 Because of mounting tensions between KBR and

Tamimi, KBR had begun “slow rolling payments” on

Tamimi’s invoices, which were computed using “the actual

headcounts at the site and the average [PPPD] rate paid

by KBR to its subcontractors,” which was roughly half of

the invoiced amount. KBR II, 103 Fed. Cl. at 734 (internal

quotation marks and citation omitted) (alteration in

original).

10 KELLOGG BROWN & ROOT SERVICES v. US

6. Change Order 9 Negotiations

These negotiations commenced on November 7, 2004,

and included multiple items, in addition to the items

listed above, and continued negotiations over the owner-

ship of the new Anaconda DFAC facilities. Ms. Hayes, a

Procurement Manager at Anaconda, was asked by KBR to

attend and became the chief and sole negotiator in nego-

tiations that spanned from approximately mid-December

2004 to the third week of January 2005. According to Mr.

Jonas, KBR’s former Vice President for Procurement

Materials and Property, due to KBR’s strategy of slow

rolling payments, KBR owed Tamimi roughly

$40,000,000.00. Ms. Hayes was unaware of this leverage

and failed to use it in her negotiations. 9

Based on the negotiations, Ms. Hayes and Tamimi

agreed to Change Order 9 to WR 3. Change Order 9

officially extended Tamimi’s period of performance at

Anaconda until December 31, 2005. Tamimi agreed that

ownership of the new DFAC facilities transferred to KBR

as of November 30, 2004. Finally, Change Order 9 re-

flected discounts that Tamimi conceded under Change

Order 6 (approximately $4,907,319.00) plus another

$22,721,827.54 in discounts; therefore, the original WR 3

pricing had been reduced by a total of $27,629,146.50

from March 2004 through December 2004.

As per Change Order 9, Tamimi agreed to the follow-

ing invoice amounts from March through December 2004:

March August

$17,062,621.37 $11,839,168.60

2004 2004

April September

$17,070,364.23 $11,722,522.57

2004 2004

9 An extremely detailed account of these negotia-

tions can be found in KBR II, 103 Fed. Cl. at 736–41.

KELLOGG BROWN & ROOT SERVICES, v. US 11

May October

$11,604,646.78 $11,843,324.53

2004 2004

June November

$11,613,139.81 $11,682,396.16

2004 2004

July December

$11,806,568.98 $6,085,825.43

2004 2004

KBR II, 103 Fed. Cl. at 741 n.9 (emphasis added). These

numbers reflected the negotiated solution to the DFAC

ownership dispute, with the amortization of the facilities

spread over all of the months until November 30, 2004,

when Tamimi agreed that ownership transferred to KBR.

Additionally, the cost of food was included for the first two

months when Tamimi was still providing food.

7. The “Boots-through-the-Door” Controversy

In October 2003, over a year before KBR and Tamimi

began negotiations for Change Order 9, the DCAA began

questioning the costs incurred at multiple DFAC facili-

ties. At this time, the main controversy concerned a

disagreement over whether the contracts were fixed-price

and KBR would “be prepared to serve the number of

troops that eventually were present at the location,” or

whether the contracts were variable-priced contracts

based on the actual number of troops serviced (“boots-

through-the-door controversy”). KBR II, 103 Fed. Cl. at

741.

In mid-2004 the Army formed the Special Cost Analy-

sis Team (“SCAT”) to perform “an in depth study of DFAC

costs and issues.” Id. at 742 (internal quotation marks

and citation omitted). The leader of the SCAT effort was

Lynn E. DeRoche, an official with the U.S. Army Tactical

Command, who began working with KBR to resolve the

boots-through-the-door issue. On March 31, 2005, KBR

and the Government entered into the Global DFAC Set-

tlement to resolve this controversy. “The Government

offered KBR an overall decrement of $55 million on costs

12 KELLOGG BROWN & ROOT SERVICES v. US

invoiced under one of the task orders from September

2003 through February 2004, which KBR accepted.” KBR

II, 103 Fed. Cl. at 743. However, the site-specific reason-

able amount for Camp Anaconda was calculated to be

greater than the amount that KBR had invoiced in sub-

contract costs at the site. “Thus, none of the $55 million

decrement was allocated to the subcontract agreement for

DFAC services at Anaconda.” Id.

The work of SCAT was ongoing. On July 8, 2005, Ms.

DeRoche authored the Price Negotiation Memorandum, a

summary of the negotiations between KBR and the Army

and the Government’s position on the Global DFAC

Settlement. One paragraph of the summary dealt specifi-

cally with costs at a group of Tamimi-run dining facilities

that included Anaconda during the March through June

2004 period included in Ms. Hayes’s negotiations. The

memorandum states:

The reduced costs reflected for the credit memo

period are the result of KBR’s protracted negotia-

tion with Tamimi, and are considered reasonable.

When the associated credits are applied to the

original invoices, the resulting costs are equiva-

lent to KBR’s new subcontract rate structure. The

new Tamimi subcontract costs were viewed as

reasonable . . . .

J.A. 5592.

Although KBR and the Army issued modifications

implementing the Global DFAC Settlement, difficulties

with Anaconda continued. On July 19, 2006, the DCAA

“issued a preliminary findings report regarding DFAC

services at Anaconda that questioned $44.8 million in

KBR costs.” KBR II, 103 Fed. Cl. at 744. Ultimately,

DCAA determined $41.1 million to be unreasonable

overcharges. After KBR submitted a claim to a contract-

ing officer for the suspended $41.1 million, and while the

contracting officer’s decision was forthcoming, KBR

KELLOGG BROWN & ROOT SERVICES, v. US 13

commenced suit in the Court of Federal Claims on June 2,

2009.

8. Procedural History

KBR brought this suit pursuant to the Contract Dis-

putes Act, 41 U.S.C. § 7101, et seq., alleging that the

Army had unreasonably withheld money from KBR when

it challenged approximately $41 million in costs and

markups associated with the Camp Anaconda dining

facilities for July through December 2004.

As the case progressed, the Government brought

counterclaims centered upon Mr. Hall and Mr. Holmes’s

acceptance of kickbacks from Mr. Khan. The Government

sought the forfeiture of KBR’s claims pursuant to a Spe-

cial Plea in Fraud, 28 U.S.C. § 2514, penalties under the

AKA, 41 U.S.C. §§ 51–58, 10 damages and penalties under

the False Claims Act (“FCA”), 31 U.S.C. §§ 3729–3733,

and damages for common-law fraud. On June 24, 2011,

the court granted in part and denied in part KBR’s motion

to dismiss the counterclaims. See Kellogg Brown & Root

Servs., Inc. v. United States, 99 Fed. Cl. 488, 516–17 (Fed.

Cl. 2011) (“KBR I”) (dismissing the Government’s coun-

terclaims under the Special Plea in Fraud and the FCA

but refusing to dismiss the AKA and common-law fraud

claims for rescission and disgorgement).

Following a ten-day bench trial, the Court of Federal

Claims determined that $11,460,940.31 of the direct costs

KBR sought were “reasonable” and thus reimbursable

pursuant to FAR § 31.201-3. Together with overhead

costs and general and administrative expenses, the court

awarded a total of $11,792,505.31 plus interest. KBR II,

103 Fed. Cl. at 780.

10 The AKA has been recodified at 41 U.S.C.

§§ 8701–07.

14 KELLOGG BROWN & ROOT SERVICES v. US

This calculation was based on a rate of $6,085,825.43

per month. This monthly rate was the price negotiated by

Ms. Hayes for the month of December 2004 and was “the

first month that Ms. Hayes negotiated that did not,

facially, include any facilities amortization.” Id. at 770. 11

The Court of Federal Claims found that KBR “has justi-

fied as reasonable a monthly pass-through cost” of this

amount. Id. at 771. The Court of Federal Claims then

multiplied that monthly cost by the six months at issue

($36,514,952.58), subtracting the amount that had al-

ready been paid to KBR ($25,054.012.27), which brought

the total still owed to KBR to $11,460,940.31.

The court also awarded the Government $38,000.00

on its AKA counterclaim, but denied the Government’s

common-law fraud claims. Id.

Both parties appealed. This court has jurisdiction

pursuant to 28. U.S.C. § 1295(a)(3).

DISCUSSION

This court reviews legal conclusions of the Court of

Federal Claims without deference and its findings of fact

for clear error. Ind. Mich. Power Co. v. United States, 422

F.3d 1369, 1373 (Fed. Cir. 2005). Contract interpretation

is a question of law, which we review de novo. Sevenson

Envtl. Servs., Inc. v. Shaw Envtl., Inc., 477 F.3d 1361,

1364–65 (Fed. Cir. 2007).

11 The Court of Federal Claims found that “[o]n this

record,” it could “not find that the facilities costs paid by

Ms. Hayes were reasonable,” and therefore chose to base

its calculation without taking into account facilities

amortization. KBR II, 103 Fed. Cl. at 770.

KELLOGG BROWN & ROOT SERVICES, v. US 15

I. KBR’S APPEAL

KBR appeals the Court of Federal Claims’s determi-

nation of reasonable fees and the calculation of KBR’s

base fee. We address each argument in turn.

1. The Court of Federal Claims Properly Evaluated Cost

Reasonableness of the Subcontract Between KBR and

Tamimi for July 2004 through December 2004.

Both parties agree that KBR is entitled to be reim-

bursed only for its “reasonable” costs under LOGCAP III.

They also agree that LOGCAP III incorporated, by refer-

ence, the cost principles in the FAR and that FAR

§ 31.201-3 (codified at Title 48 of the Code of Federal

Regulations) governs the assessment of the reasonable-

ness of KBR’s costs. That provision states that a cost is

reasonable “if, in its nature and amount, it does not

exceed that which would be incurred by a prudent person

in the conduct of competitive business.” FAR § 31.201-

3(a). The regulation further provides that:

(b) What is reasonable depends upon a variety

of considerations and circumstances, including—

(1) Whether it is the type of cost generally

recognized as ordinary and necessary for the con-

duct of the contractor’s business or the contract

performance;

(2) Generally accepted sound business

practices, arm’s length bargaining, and Federal

and State laws and regulations;

(3) The contractor’s responsibilities to the

Government, other customers, the owners of the

business, employees, and the public at large; and

(4) Any significant deviations from the

contractor’s established practices.

FAR § 31.201-3(b).

16 KELLOGG BROWN & ROOT SERVICES v. US

KBR admits that the language above “emphasizes its

nonexclusivity, saying reasonableness ‘depends upon a

variety of considerations and circumstances, including’

but not limited to those listed in the regulation.” KBR

Reply Br. 14 (emphasis in the original). Notwithstanding,

KBR’s core argument is that the Court of Federal Claims

committed legal error by “appl[ying] an improper stand-

ard for reviewing the reasonableness of costs under the

Contract Disputes Act . . . .” KBR Br. 29. According to

KBR, “cost-reimbursement contracts require only that the

contractor gives its ‘best efforts’ when performing, and its

costs are payable absent gross misconduct” or “absent

arbitrary action or a clear abuse of discretion.” Id. at 32.

KBR’s suggested standard of review finds no support

in the text of section 31.201-3 or our precedent. Section

31.201-3 of the FAR affords the reviewing officer or court

considerable flexibility in assessing the reasonableness of

costs. The words “arbitrary,” “gross negligence,” and

“willful misconduct” do not appear in the text. Our prior

authority on cost reasonableness is contrary to KBR’s

position. In Boeing North American, Inc. v. Roche, this

court reasoned that a cost could be “unreasonable” under

section 31.201-3 when “the contractor overcharge[d] the

government for the materials.” 298 F.3d 1274, 1281 (Fed.

Cir. 2002). Absent from the court’s example was any

suggestion that the “overcharge” must be based on gross

negligence or arbitrary behavior. Although evidence of

willful misconduct, gross negligence, or arbitrary conduct

could well provide a basis for a contracting officer or court

to disallow costs under the regulation, such evidence is

not required. KBR offers many pages of non-binding law

to illustrate the amount of discretion courts have afforded

to contractors. 12 However, KBR offers no binding prece-

12 KBR states: “The court’s conclusion conflicts with

the bedrock principle that the government bears all risk

in cost-reimbursement contracting and a half-century of

KELLOGG BROWN & ROOT SERVICES, v. US 17

dent in defense of their position that all risk in cost-

reimbursement contracting falls on the Government and

does not dispute that KBR is entitled to be reimbursed

only for its “reasonable” costs under LOGCAP III.

Rather, the Court of Federal Claims applied the cor-

rect standard articulated by FAR § 31.201-3, and its

analysis was consistent with the regulation’s admonition

that the reasonableness of specific costs “must be exam-

ined with particular care” when the costs incurred “may

not be subject to effective competitive restraints.” FAR

§ 31.201-3(a).

In addition to arguing that the Court of Federal

Claims employed the wrong standard, KBR argues at

length that the court improperly assessed specific evi-

dence with regard to cost reasonableness by crediting the

wrong information at trial and ignoring other pertinent

information.

Cost reasonableness “is a question of fact.” Gen. Dy-

namics Corp. v. United States, 410 F.2d 404, 409 (Ct. Cl.

1969). The court will overturn factual determinations

only when they are clearly erroneous. See Ind. Mich.

Power Co., 422 F.3d at 1373. The standard for assessing

reasonableness is flexible, allowing the Court of Federal

Claims to consider many fact-intensive and context-

specific factors. See FAR § 31.201-3. The Court of Federal

Claims’s two opinions total roughly 150 pages, and com-

prehensively articulate the court’s assessment of the cost

reasonableness of the Tamimi subcontract from July 2004

case law acknowledging contractors’ considerable discre-

tion and holding costs to be reasonable absent gross

misconduct.” KBR Reply Br. 8–9 (emphasis added).

18 KELLOGG BROWN & ROOT SERVICES v. US

to December 2004. We address each of KBR’s specific

arguments in turn. 13

A. The Court of Federal Claims’s Analysis of KBR’s

Effort at Self-Performance Did Not Impermissibly Focus

on Outcome Rather than “Best Efforts.”

The Court of Federal Claims found that KBR’s sum-

mer 2004 effort to end Tamimi’s involvement by self-

performing dining services was “disastrous.” See KBR II,

103 Fed. Cl. at 752, 758. KBR argues that this was

reversible error since the Court of Federal Claims suppos-

edly focused on the outcome of KBR’s decision to self-

perform, not its reasonableness ex ante. KBR Br. 40. KBR

argues that this “error unquestionably infected the court’s

assessment of the reasonableness of all KBR’s June-

December 2004 prices.” Id. at 43 (emphasis in original).

Contrary to KBR’s characterization, the Court of Fed-

eral Claims did not conclude that KBR’s costs were un-

reasonable based solely on KBR’s failed self-performance.

Rather, it adopted KBR’s urging at trial that reasonable-

ness must be determined in context, not based on stand-

ards for “conference room” contracting. KBR II, 103 Fed.

Cl. at 751. The Court of Federal Claims agreed with KBR

that “costs need to be reasonable, not in a vacuum, but in

13 KBR bore the initial burden to establish that its

costs were reasonable. FAR § 31.201-3(a). As noted by the

Court of Federal Claims, “[p]reviously, a contractor’s

incurred costs were entitled to a presumption of reasona-

bleness, and the Government bore the burden of proving

that the costs were unreasonable”; however, this pre-

sumption was superseded in 1987 when FAR § 31.201-3

was amended. KBR II, 103 Fed. Cl. at 749–50 (citing 52

Fed. Reg. 19,800, 19,804 (May 27, 1987)); Ace Construc-

tors, Inc. v. United States, 70 Fed. Cl. 253, 275 (2006);

George Sollitt Constr. Co. v. United States, 64 Fed. Cl.

229, 245 (2005)).

KELLOGG BROWN & ROOT SERVICES, v. US 19

the context of the events in which they arose.” Id. But, it

cautioned KBR that consideration of all of the circum-

stances cut both ways: “KBR cannot now point to a deficit

in bargaining power and contend that its weakened state

entitles it to greater latitude” because a “contractor may

not itself manufacture—or in this case exacerbate—a

situation that leads to higher costs for the Govern-

ment . . . .” Id. at 752. Here, the Court of Federal Claims

found that KBR was in a weak position with Tamimi,

which stemmed from KBR’s own conduct, including

“fail[ure] to negotiate prices prospectively” and its “at-

tempt to self-perform the work at Anaconda.” Id. at 758.

These observations did not end the Court of Federal

Claims’s analysis. Even in its weakened position, KBR

failed to act prudently to improve its leverage: “the court

finds that the prudent business person would have seized

any available advantage,” which for KBR was $40 million

in withheld funds that Ms. Hayes, KBR’s negotiator, did

not know about or use to KBR’s advantage. Id. The

subsidiary finding, that KBR’s disastrous self-

performance harmed its bargaining position with Tamimi,

is not clearly erroneous, nor was it legal error to consider

this fact in assessing cost reasonableness.

Additionally, even if there had been an infirmity in

the Court of Federal Claims’s discussion of self-

performance, self-performance was only one of numerous

findings supporting the Court of Federal Claims’s reason-

ableness determination. See FAR § 31.201-3(b) (providing

that reasonableness is determined based “upon a variety

of considerations and circumstances”). Finally, KBR’s

self-performance argument attacks the Court of Federal

Claims’s weighing of the evidence, which this court will

rarely disturb. See Pacific Gas & Elec. Co. v. United

States, 668 F.3d 1346, 1353 (Fed. Cir. 2012) (weighing of

evidence is “within the special province of the trial judge”)

(internal quotation marks and citation omitted).

20 KELLOGG BROWN & ROOT SERVICES v. US

B. The Court of Federal Claims Did Not Impermissibly

Second-Guess KBR’s Arm’s-Length Negotiations with

Tamimi or Fail to Consider KBR’s Collective Knowledge

in Assessing Reasonableness.

Similar to its argument above, KBR also contends

that the Court of Federal Claims impermissibly “second-

guessed” KBR’s negotiations with Tamimi. KBR Br. 43–

48. KBR argues that the court failed to give the proper

weight to this “arm’s length bargaining” and how such

bargaining supports a determination of reasonableness.

Id. at 43 (citing FAR § 31.201-3(b)(2)). KBR argues that

the Court of Federal Claims’s assessment of these negoti-

ations runs afoul of both the “business judgment rule” and

the requirement that the court look to management

collectively, not to the actions of individual employees. Id.

at 44, 46–47.

KBR analogizes its requested standard, the “business

judgment rule,” to “its corporate-law analogue,” which

restricts courts from imposing liability “‘in the absence of

a showing of abuse of discretion, fraud, bad faith, or

illegality.’” Id. at 36 (quoting In re Bal Harbour Club, Inc.,

316 F.3d 1192, 1195 (11th Cir. 2003)). Similarly, Amici

Curiae the Professional Services Council and the National

Defense Industrial Association argue that the Court of

Federal Claims applied the wrong standard but do not

urge the extreme standard argued by KBR. Amici Curiae

offer instead that “what a contractor must prove, and

what the [Court of Federal Claims] or [Board of Contract

Appeals] must determine de novo, is whether any prudent

businessperson in the contractor’s position would have

incurred the disputed cost.” Amici Curiae Br. 8, 10 (em-

phases in original). As stated above, the Court of Federal

Claims employed the correct standard to determine cost-

reasonableness.

FAR § 31.201-3(a) requires the court to examine the

reasonableness of a contractor’s actions to ensure that

KELLOGG BROWN & ROOT SERVICES, v. US 21

those actions result in costs that do not exceed “that

which would be incurred by a prudent person in the

conduct of competitive business.” A trial court’s review is

not restricted to only “management” actions. If a contrac-

tor acts primarily through one employee, manager or not,

that employee’s actions may well be a focus of the reason-

ableness inquiry. 14

KBR again appears to contest the trial court’s weigh-

ing of the evidence and its assessment of KBR’s witnesses.

“[I]n reviewing factual findings under the clear error

standard, this court ‘gives great deference to the [trial]

court’s decisions regarding credibility of witnesses.’”

Medichem, S.A. v. Rolabo, S.L., 437 F.3d 1157, 1171 (Fed.

Cir. 2006) (citing Ecolochem, Inc. v. S. Cal. Edison Co.,

227 F.3d 1361, 1378–79 (Fed. Cir. 2000)).

The Court of Federal Claims found the agreement

arising from Change Order 9 was unreasonable, based in

part on its determination that KBR’s negotiator, Ms.

Hayes, failed to leverage withheld funds, did not set goals

for the negotiation, and could not justify the prices. Ms.

Hayes’s testimony did not convince the court otherwise.

Rather, it found that “the enthusiastic endorsement of

Ms. Hayes by Mr. Jonas and plaintiff’s counsel was borne

out by neither her testimony nor the record of her negoti-

ations that she included in her Negotiation Memorandum

dated March 29, 2005. Her testimony was in the nature

of summations on the topics, flavored with anecdotes.”

KBR II, 103 Fed. Cl. at 736 (internal citation omitted).

KBR argues the court improperly “gave no weight” to the

fact that Change Order 9 arose from an arm’s-length

negotiation. See KBR Br. 43. The court’s credibility

determinations and extensive assessment of the Change

Order 9 negotiations are not clearly erroneous.

14 Ms. Hayes testified that she was a procurement

manager. KBR II, 103 Fed. Cl. at 735.

22 KELLOGG BROWN & ROOT SERVICES v. US

C. The Court of Federal Claims Did Not Clearly Err in

Evaluating the Army’s Directives.

KBR contends that the Court of Federal Claims failed

to consider the Army’s directives in evaluating reasona-

bleness. KBR Br. 48–51. According to KBR, although the

Court of Federal Claims “recognized that the Army had

told KBR that it was imperative for troop morale that

soldiers in the field have hot, freshly prepared meals,” the

Court of Federal Claims “refused to weigh the urgency of

the action—and the risk of non-performance . . . —in

evaluating the reasonableness of the prices negotiat-

ed . . . .” Id. at 48 (emphasis in original).

KBR correctly notes that the FAR instructs “‘contrac-

tor’s responsibilities to the Government’” to be considered

in evaluating reasonableness. Id. at 48–49 (quoting FAR

§ 31.201-3(b)(3)). The Court of Federal Claims repeatedly

considered all the circumstances, including the Army’s

directives and the fact that the costs were incurred in a

demanding war-time environment. See KBR II, 103 Fed.

Cl. at 752 (noting “the Army placed great demands on

KBR at the outset of the war” and “the urgent need to

provide many services in many locations for the Army”);

id. (noting that the Army “favored” Tamimi); id. at 751

(concurring that KBR “need[ed] to fulfill the demands of

the Government in performing under LOGCAP III”); id.

at 752–53 (noting costs were incurred from a war “initial-

ly conducted as a contingency operation . . . that became a

sustained effort”); id. at 753 (recognizing that costs “were

impacted by fluctuating projections for the number of

troops on the ground”); id. (stating that costs “were driven

by the singular goal of putting DFAC facilities in place to

offer warm meals to the troops by July 4, 2003”); id. at

726–27 (acknowledging that the “constantly changing

demands required by the Army’s effort were foreseeable to

neither the Army nor to KBR”).

KELLOGG BROWN & ROOT SERVICES, v. US 23

The Court of Federal Claims’s consideration of that

evidence and assessment of the Army’s directives was not

clearly erroneous.

D. The Court of Federal Claims Did Not Clearly Err in

Not Awarding Any Sum for the Amortization of Facilities

Cost nor Did It Impermissibly Equate Reasonable Costs

with Lowest Costs.

KBR argues that the Court of Federal Claims incor-

rectly adopted the December 2004 pricing as the amount

reasonably supportable, arguing that the Court of Federal

Claims conflated reasonable cost with “lowest cost.” KBR

Br. 53–56. According to KBR, “there is no evidence what-

soever that Tamimi, or any other contractor, would have

accepted that as a stand-alone figure—the lowest price

ever obtained for Anaconda, cherry-picked out of a 22-

month package deal, divorced from other terms favoring

Tamimi.” KBR Reply Br. 21 (emphasis removed). 15

The Court of Federal Claims was within its discretion

in finding that KBR failed to prove that its costs were

reasonable. KBR declined to present independent evi-

dence of the reasonableness of the facilities costs (or any

other component of the challenged costs). KBR II, 103

Fed. Cl. at 752. The Court of Federal Claims was “confi-

dent” of the evidence that KBR had paid “most” of the

expense of the facilities to Tamimi by July 2004 (i.e.,

before the period of costs at issue in this lawsuit). Id. at

770. It seems that KBR seeks a presumption that it is

entitled to reimbursement simply because it incurred

15 As stated by KBR: “the court took [the December

2004] price—at 55% below Change Order 6 pricing, the

lowest price KBR ever achieved for that facility, and a far

greater reduction than KBR had achieved in any other

renegotiation or competition—and applied it to the entire

period services were provided[.]” KBR Br. 55–56 (empha-

ses in original) (citations omitted).

24 KELLOGG BROWN & ROOT SERVICES v. US

facilities costs. It is not. See FAR § 31.201-3(a) (providing

that it is the contractor’s burden to prove the reasonable-

ness of costs and that “[n]o presumption of reasonable-

ness” exists).

Similarly, the Court of Federal Claims’s decision to

base its calculation on the negotiated December 2004

pricing is not clear error. FAR § 31.201-3, which provides

the standard for determining reasonableness, affords the

Court of Federal Claims considerable discretion in deter-

mining whether a cost is reasonable and therefore allow-

able. The Court of Federal Claims used Tamimi’s July

2004 competitive bid proposal as a guide for its reasona-

bleness analysis, even though it “was not the lowest of the

bids to be received in response to the July 2004 solicita-

tion.” KBR II, 103 Fed. Cl. at 770. 16 The Court of Federal

Claims stated that “subsequent events would suggest that

[Tamimi’s July 2004 bid] was itself inflated.” Id. As

discussed above, although it was KBR’s burden to prove

reasonableness, KBR chose not to provide independent

analysis to show the reasonableness of its costs. Having

chosen to proceed by what the Court of Federal Claims

characterized as “circumstantial” evidence (e.g., the Hayes

negotiations, the Global DFAC Settlement, and the DCAA

audits), see id. at 752, and attempting to show reasona-

bleness by focusing on Change Order 9’s “discounts” from

earlier prices, KBR has not now shown the Court of

Federal Claims’s weighing of the evidence or calculation

of price was clearly erroneous.

E. The Court of Federal Claims Did Not Err in Its Eval-

uation of the Price Negotiation Memorandum.

KBR argues that a one-paragraph “admission” in the

Price Negotiation Memorandum should constitute compel-

16 As discussed above, KBR ultimately elected to

self-perform the DFAC services instead of making an

award based on the July 2004 solicitation.

KELLOGG BROWN & ROOT SERVICES, v. US 25

ling evidence of the reasonableness of the prices at Camp

Anaconda. 17 The Court of Federal Claims rejected this

argument, stating that KBR “attempt[ed] to place more

weight on the one paragraph in Ms. DeRoche’s [memo]

than it can fairly bear.” KBR II, 103 Fed. Cl. at 761. The

Court of Federal Claims went on to note that “[w]hile Ms.

DeRoche was a highly credentialed government employee,

the sheer scope [of the report at issue] colors any argu-

ment that price reasonableness at any one particular

[dining facility] was considered.” Id. The court’s decision

to find the one paragraph concerning Camp Anaconda to

be less persuasive than the information gleaned at the

trial was not clearly erroneous.

2. The Court of Federal Claims’s Calculation of KBR’s

Base Fee Was Incorrect.

According to KBR, “[t]he court’s erroneous fee calcula-

tion is a second independent basis for reversal.” KBR Br.

59. The Court of Federal Claims awarded KBR a base fee

calculated as 1% of the total amount of direct costs it

awarded as reasonable ($11,460,940.31), or $114,609.40.

KBR II, 103 Fed. Cl. at 780. According to KBR, however,

because the LOGCAP III contract called for a fixed-base

17 As noted in the Background section, on July 8,

2005, Ms. DeRoche authored the Price Negotiation Memo-

randum, which stated in part:

The reduced costs reflected for the credit memo

period are the result of KBR’s protracted negotia-

tion with Tamimi, and are considered reasonable.

When the associated credits are applied to the

original invoices, the resulting costs are equiva-

lent to KBR’s new subcontract rate structure. The

new Tamimi subcontract costs were viewed as

reasonable . . . .

J.A. 5592.

26 KELLOGG BROWN & ROOT SERVICES v. US

fee by which KBR would receive “1% of all fee-bearing

costs,” J.A. 5105 (emphasis added), that fixed base fee

remains the same regardless of the costs KBR actually

incurred, whether reasonable or not. KBR Br. 59.

It seems the Government agrees: “The base fee, as

KBR correctly argues, is owed to it for negotiated esti-

mated costs.” Gov’t. Br. 77 (citing KBR Br. 60). However,

the Government argues, somewhat confusingly, that

because there was “no evidence presented that KBR will

not be paid the balance of the base fee that had been

calculated based upon its estimated costs on contract

close-out,” this court has no basis “to make such an award

at this appeal.” Gov’t. Br. 77–78.

KBR responds that “the government provides no rea-

son KBR must wait until LOGCAP’s conclusion to receive

the fee it admits is rightly due for services performed

nearly a decade ago, or why this Court must leave a

flawed judgment intact.” KBR Reply Br. 23.

The record shows that the base fee is to be calculated

as follows:

The fee for this contract is composed of a base fee

of 1% of all fee-bearing costs. Fee bearing costs

shall be established based on negotiated estimat-

ed costs to execute the effort.

J.A. 5105. The Court of Federal Claims incorrectly calcu-

lated the base fee to be awarded, and that determination

is reversed and remanded with instructions to calculate

the fee consistently with this opinion.

II. THE GOVERNMENT’S CROSS-APPEAL

Turning to the Government’s cross-appeal, the Gov-

ernment argues that the subcontract at issue was fraudu-

lent from its inception and that the subcontract “could

never have been awarded without the acquiescence of

KBR’s corrupted Food Services managers, who also inter-

KELLOGG BROWN & ROOT SERVICES, v. US 27

vened on Tamimi’s behalf when KBR’s subcontract ad-

ministrator decided to award the Camp Anaconda DFAC

subcontract to one of Tamimi’s competitors.” Gov’t. Br. 21.

KBR responds that the Court of Federal Claims “correctly

rejected the government’s ‘relentless efforts to shoehorn’

this contract dispute into the rubric of fraud, seeking to

recoup hundreds of millions of dollars for fully—and

successfully—performed services based on ‘taint’ allegedly

caused by $38,000.00 in kickbacks to two ‘mid-level’

employees.” KBR Reply Br. 9 (quoting KBR II, 103 Fed.

Cl. at 771).

The Government challenges the Court of Federal

Claims’s holdings regarding the following claims: Special

Plea in Fraud, 28 U.S.C. § 2514; False Claims Act

(“FCA”), 31 U.S.C. §§ 3729–3733; Anti-Kickback Act

“(AKA”), 41 U.S.C. §§ 51–58; and common-law fraud.

This court reviews the Court of Federal Claims’s findings

with respect to each statute individually, because liability

under one statute does not automatically trigger liability

under the others. See Miller v. United States, 550 F.2d 17,

22–23 (Ct. Cl. 1977) (negligence and ineptitude are not

“practicing a fraud,” but may establish liability under the

False Claims Act); Little v. United States, 152 F. Supp. 84,

87–88 (Ct. Cl. 1957) (claimant practiced fraud and thus

forfeited claim, but was not liable under the False Claims

Act); Young-Montenay Inc. v. United States, No. 90–

3862C, 1993 WL 721993, at *4 (Fed. Cl. Jan. 6, 1993),

aff’d, 15 F.3d 1040 (Fed. Cir. 1994) (claimant was liable

under the False Claims Act but not under the Contract

Disputes Act’s Anti-Fraud provision).

“This court . . . reviews de novo a dismissal for failure

to state a claim pursuant to Rule 12(b)(6) of the Court of

Federal Claims, just as it does dismissals under Federal

Rule of Civil Procedure 12(b)(6).” Laguna Hermosa Corp.

v. United States, 671 F.3d 1284, 1288 (Fed. Cir. 2012). “A

complaint must be dismissed under Rule 12(b)(6) when

the facts asserted do not give rise to a legal remedy or do

28 KELLOGG BROWN & ROOT SERVICES v. US

not elevate a claim for relief to the realm of plausibility.”

Id. (internal citations omitted). In deciding a motion to

dismiss, the court must accept well-pleaded factual alle-

gations as true and must draw all reasonable inferences

in favor of the claimant. Lindsay v. United States, 295

F.3d 1252, 1257 (Fed. Cir. 2002).

Following a trial, we review the factual findings of the

Court of Federal Claims for clear error and its legal

conclusions de novo. Am. Pelagic Fishing Co., L.P. v.

United States, 379 F.3d 1363, 1371 (Fed. Cir. 2004).

1. The Court of Federal Claims Correctly Dismissed the

Government’s Special Plea in Fraud, Brought Pursuant to

28 U.S.C. § 2514 (“the Forfeiture Statute”).

The forfeiture statute provides that:

A claim against the United States shall be forfeit-

ed to the United States by any person who cor-

ruptly practices or attempts to practice any fraud

against the United States in the proof, statement,

establishment, or allowance thereof.

28 U.S.C. § 2514. To prevail, the Government must prove

its allegations by clear and convincing evidence. UMC

Elecs. Co. v. United States, 249 F.3d 1337, 1338–39 (Fed.

Cir. 2001).

This court has held that to prevail on a counterclaim

alleging fraud under 28 U.S.C. § 2514, the challenger is

required to “‘establish by clear and convincing evidence

that the contractor knew that its submitted claims were

false, and that it intended to defraud the government by

submitting those claims.’” Daewoo Eng’g & Constr. Co. v.

United States, 557 F.3d 1332, 1341 (Fed. Cir. 2009) (quot-

ing Commercial Contractors v. United States, 154 F.3d

1357, 1362 (Fed. Cir. 1998)); accord Glendale Fed. Bank,

FSB v. United States, 239 F.3d 1374, 1379 (Fed. Cir.

2001). “[F]orfeiture under 28 U.S.C. § 2514 requires only

KELLOGG BROWN & ROOT SERVICES, v. US 29

part of the claim to be fraudulent.” Daewoo Eng’g, 557

F.3d at 1341.

The Government argues that the Court of Federal

Claims incorrectly held this statute inapplicable, stating

that (as in the analogous FCA context), “any invoice

submitted upon a fraud-tainted contract supports the

finding of a ‘false or fraudulent’ claim.” Gov’t. Br. 27

(emphasis added). The Government urges a finding of

fraud, supporting forfeiture, “when fraud in the contract

performance undermined the legitimacy of the contract

upon which the plaintiff sought compensation.” Id. at 27–

28.

This is an impermissibly broad reading of the law.

The Court of Federal Claims correctly limited the statute:

A valid cause of action under [the forfeiture stat-

ute] must be tied to the submission of a claim,

whether in producing false proof to support a

claim, see, e.g., [Kamen Soap Prods. Co. v. United

States, 124 F. Supp. 608, 622 (1954)] (forfeiting

claim because falsified documentation was sub-

mitted in presentation of claim), or in falsely es-

tablishing the claim, see, e.g., [N.Y. Mkt.

Gardeners’ Ass’n v. United States, 43 Ct. Cl. 114,

136 (1908)] (Government’s objection to claim

based on contractor’s not fulfilling contract speci-

fications, i.e., “establishment” of a false claim).

KBR I, 99 Fed. Cl. at 501. On its face, the statute is

limited to those circumstances where the Government

proves fraud “in the proof, statement, establishment or

allowance” of a claim at the Court of Federal Claims, not

in the execution of a contract. 18

18 Several other Court of Federal Claims decisions

state otherwise: “The words of the statute make it appar-

ent that a claim against the United States is to be forfeit-

30 KELLOGG BROWN & ROOT SERVICES v. US

Statutory context confirms this reading. Alexander v.

Sandoval, 532 U.S. 275, 288 (2001) (beginning analysis of

the statute at issue with the text and structure of the

statute). The provision codified at section 2514 was part

of legislation creating the Court of Federal Claims and

regulating its operations and procedure. See Act of Mar. 3,

1863, ch. 92, 12 Stat. 765, 767. The surrounding provi-

sions concern requirements for filing claims, including

time limits and verification. Thus, the neighboring provi-

sions illustrate that the forfeiture statute is best under-

stood as a companion requirement of claims procedure

rather than a catch-all anti-fraud provision. The legisla-

tion’s sponsors confirmed the forfeiture statute addressed

fraud by “any claimant against th[e] Government in the

demand or establishment of his claim . . . .” Cong. Globe,

37th Cong., 2d Sess. 1674 (1862) (statement of Rep.

Bingham). And this court’s predecessor concluded the

forfeiture statute addressed “frauds committed in the

proof of claims before the newly empowered Court of

Claims.” O’Brien Gear & Mach. Co. v. United States, 591

F.2d 666, 678 (Ct. Cl. 1979). 19

ed if fraud is practiced during the contract performance or

in the making of the claim.” Crane Helicopter Servs., Inc.

v. United States, 456 Fed. Cl. 410, 431 (1991) (emphasis

added); see also Anderson v. United States, 47 Fed. Cl.

438, 444 (2000); Supermex, Inc. v. United States, 35 Fed.

Cl. 29, 39–40 (1996). This is an impermissibly broad

reading of the statute.

19 This court has held that “[t]o prevail under [28

U.S.C. § 2514], the government is required to establish by

clear and convincing evidence that the contractor knew

that its submitted claims were false, and that it intended

to defraud the government by submitting those claims.”

Glendale Fed. Bank FSB v. United States, 239 F.3d 1374,

1379 (Fed. Cir. 2001) (internal quotation marks and

citation omitted) (alterations in original). The Govern-

KELLOGG BROWN & ROOT SERVICES, v. US 31

The Court of Federal Claims correctly dismissed the

Government’s Special Plea in Fraud claim.

2. The Court of Federal Claims Correctly Dismissed

Counterclaims Brought Pursuant to the False Claims Act

(“FCA”), 31 U.S.C. §§ 3729–3733.

To state an FCA claim, the Government must show

“(1) the contractor presented or caused to be presented to

an agent of the United States a claim for payment; (2) the

claim was false or fraudulent; (3) the contractor knew the

claim was false or fraudulent; and (4) the United States

suffered damages as a result . . . .” Young-Montenay, 15

F.3d at 1043.

The Government argues two reasons why the Court of

Federal Claims incorrectly dismissed its FCA claims. The

first is that the invoices for the Camp Anaconda dining

services subcontract were false or fraudulent because the

subcontract itself was tainted by kickbacks. However, the

Government does not argue here and did not argue below

that the invoices themselves were false or fraudulent, a

showing that is required for a FCA claim to be successful.

As correctly pointed out by the Court of Federal Claims,

“[n]o presumption applies to the FCA that would relieve

defendant of its burden to plead facts supporting the

elements of an FCA claim.” KBR I, 99 Fed. Cl. at 510.

The Government must claim the threshold requirements

ment does not appear to plead the requisite “intent to

defraud.” Rather than alleging that KBR intended to

defraud the Government in filing its claim in the Court of

Federal Claims, the Government alleges that Hall and

Holmes “knew or had reason to know” their kickbacks

would lead to inflated contract prices. Defendant’s

Amended Answer and Counterclaims, J.A.150–51, ¶118.

The Government thus alleges fraud in the execution of the

contract, not fraud in the submission of a claim, as re-

quired by section 2514.

32 KELLOGG BROWN & ROOT SERVICES v. US

under the FCA, i.e., that a false or fraudulent claim was

submitted and that KBR knew of its falsity. See Young-

Montenay, 15 F.3d at 1043. 20

The Government also argues its allegations are suffi-

cient because the invoices at issue should be presumed to

be inflated by at least the amount of the kickback, if not

more. Gov’t. Br. 39. The Government states that “[t]here

is no principled reason why the common-law presumption

of price inflation should not apply to the facts alleged

here.” Id. at 41. Again, however, the Government offers

no reason why in this particular case, the Government

should be discharged from alleging the threshold re-

quirements of an FCA claim. As the Court of Federal

Claims held: “Defendant must allege facts showing that

the costs actually inflated the contract price.” KBR I, 99

Fed. Cl. at 513. 21 None of the cases cited by the Govern-

20 While there is a line of cases attaching FCA

liability for false statements that induced the Government

to award a contract, see Harrison v. Westinghouse Savan-

nah River, 176 F.3d 776, 787–88 (4th Cir. 1999), the

Government does not seem to allege “fraud in the in-

ducement” here, see KBR Reply Br. 43 n.21; but see Gov’t.

Reply Br. 14 n.7 (disagreeing that the Government had

“disclaimed reliance on a line of case law about ‘fraud in

the inducement’”). Even if the Government had alleged

fraud in the inducement, as the Court of Federal Claims

stated, “[t]hese cases do not support the proposition that

an FCA claim can be based on taint from a kickback

alone.” KBR I, 99 Fed. Cl. at 513.

21 This would be difficult to accomplish because of

the Government’s attenuated allegations that $38,000.00

in kickback payments made in 2003 resulted in inflated

invoices for approximately $468 million worth of services

performed into 2005. See KBR Reply Br. 46.

KELLOGG BROWN & ROOT SERVICES, v. US 33

ment indicate that the Government can forgo compliance

with ordinary rules of pleading and proof. 22

3. The Court of Federal Claims Erred When It Deter-

mined that the Actions of KBR’s Head of Food Services for

Iraq and Kuwait and His Deputy Should Not Be Imputed

to KBR, for Purposes of Liability Under the Anti-

Kickback Act (“AKA”), 41 U.S.C. §§ 51–58.

The AKA sets forth two separate civil remedies as fol-

lows:

(1) The United States may, in a civil action, recov-

er a civil penalty from any person who knowingly

engages in conduct prohibited by section 53 of this

title. The amount of such civil penalty shall be—

(A) twice the amount of each kickback in-

volved in the violation; and

(B) not more than $10,000 for each occur-

rence of prohibited conduct.

(2) The United States may, in a civil action, recov-

er a civil penalty from any person whose employ-

ee, subcontractor or subcontractor employee

violates section 53 of this title by providing, ac-

cepting, or charging a kickback. The amount of

such civil penalty shall be the amount of that

kickback.

41 U.S.C. § 55(a) (emphasis added). Under this statutory

scheme, a “kickback” is defined, in relevant part, as

22 Additionally, the Court of Federal Claims found

that “even if KBR’s reimbursement vouchers were inflated

by the amount of the kickbacks, defendant has not alleged

facts tending to show that anyone at KBR, including

Messrs. Hall and Holmes, knew of that inflation.” KBR I,

99 Fed. Cl. at 513. Accordingly, the Government failed to

allege the requisite knowledge for a FCA claim.

34 KELLOGG BROWN & ROOT SERVICES v. US

any money, fee, commission, credit, gift, gratuity,

thing of value, or compensation of any kind which

is provided, directly or indirectly, to any prime

contractor, prime contractor employee . . . for the

purpose of improperly obtaining or rewarding fa-

vorable treatment in connection with a prime con-

tractor or . . . a subcontract relating to a prime

contract.

Id. § 52(2).

The Court of Federal Claims, in interpreting the AKA,

found that a corporation can be held vicariously liable

under both § 55(a)(1) and § 55(a)(2). However, it found

that the KBR officials who accepted kickbacks were not

sufficiently senior to warrant a finding of vicarious liabil-

ity in this case. Accordingly, the court held KBR liable

only for the amount of the kickback under § 55(a)(2). We

address each holding in turn.

Our analysis begins with the language of the statute.

Youngblood v. Sec’y of Health & Human Servs., 32 F.3d

552, 554 (Fed. Cir. 1994) (citing K Mart Corp. v. Cartier,

Inc., 486 U.S. 281, 291 (1988)). It is a well-settled princi-

ple of statutory interpretation that a “statute is to be

construed in a way which gives meaning and effect to all

of its parts.” Saunders v. Sec’y of Health & Human Servs.,

25 F.3d 1031, 1035 (Fed. Cir. 1994) (citing United States

v. Nordic Vill., Inc., 503 U.S. 30, 36 (1992) (noting the

“settled rule that a statute must, if possible, be construed

in such fashion that every word has some operative ef-

fect”)).

The Court of Federal Claims correctly determined

that § 55(a) of the AKA contemplates vicarious liability in

both civil penalty provisions under subsections 1 and 2.

Section 55(a)(1) directs that a civil penalty may be recov-

ered from any “person,” which is defined to include indi-

viduals, corporations, and other business associations. See

41 U.S.C. § 52(3). Section 55(a)(1) necessarily includes

KELLOGG BROWN & ROOT SERVICES, v. US 35

the definition of “person” and, in doing so, establishes

liability for a “corporation.” See 41 U.S.C. § 52(3). To hold

otherwise would strip the term “person” of its plainly

intended definition.

The difference between § 55(a)(1) and § 55(a)(2) is the

degree of knowledge that must be proven. The former

provision—which carries a higher penalty—applies if the

person knowingly engages in prohibited conduct. The

latter provides for strict liability against a “person” who

engages in prohibited conduct.

KBR argues that this reading would render Con-

gress’s reference to acts committed by an “employee,

subcontractor, or subcontractor employee,” which appears

only in § 55(a)(2), superfluous. Indeed, there is tension

between the definition of “person” in both sections and the

presence of “employee, subcontractor, or subcontractor

employee” in only § 55(a)(2). The legislative history,

however, clarifies the point:

Section [55(a)(1)] is meant to permit a civil recov-

ery against anyone who knowingly engages in

kickback activities . . . . It is intended to subject

not only subcontractors and kickback recipients to

civil liability, but also prime contractors, inde-

pendent sales representatives and others who

knowingly participate in kickback activities. It is

also intended to reach companies whose employ-

ees engage in kickbacks, under the doctrine of re-

spondeat superior.

132 Cong. Rec. S16,311 (daily ed. Oct. 15, 1986) (state-

ment of Sen. Carl Levin). The distinction between the

two different provisions rests on the degree of knowledge

that must be proven, not the types of persons to whom the

provisions apply.

After correctly determining that both sections con-

template vicarious liability, the Court of Federal Claims

36 KELLOGG BROWN & ROOT SERVICES v. US

then found that this case was not an appropriate case for

finding vicarious liability: “Section 55(a)(2) anticipates

circumstances where a prime contractor’s employees are

accepting kickbacks for which the prime contractor should

be held responsible, yet they are doing so without corpo-

rate knowledge of their activities or they occupy positions

of diminished or low authority, such that an imputation of

knowledge to the prime contractor would be inappropri-

ate.” KBR II, 103 Fed. Cl. at 774. The Court of Federal

Claims also stated that “[a]lthough facts in this case

approach the dividing line, the court rules that strict

liability under § 55(a)(2) is the appropriate and sole

remedy in this case.” Id.

The Government on appeal seeks to hold KBR liable

under § 55(a)(1) of the AKA for the kickbacks accepted by

KBR’s employees, Hall and Holmes. 23 The Government

argues that the Court of Federal Claims erred by not

applying the correct principle of respondeat superior, and

instead “making the qualitative determination, without

articulating any test, that the two were insufficiently high

in the corporate hierarchy for their actions and knowledge

to be imputed to KBR.” Gov’t. Br. 43. The Government

argues that the Court of Federal Claims erred “by focus-

ing on the position KBR’s employees occupied within

KBR’s corporate hierarchy, rather than on simply wheth-

er they were KBR’s agents and whether they were acting

within the scope of their employment.” Gov’t. Reply Br.

21.

Corporations act through their employees; the general

rule is that an agent’s knowledge is imputed to the prin-

23 The Court of Federal Claims awarded the Gov-

ernment $38,000.00 for KBR’s violation of the AKA under

subsection 2, the actual amount of the payments the

Court of Federal Claims found to have been taken by

KBR’s employees.

KELLOGG BROWN & ROOT SERVICES, v. US 37

cipal when employees are acting with the scope of their

authority or employment, absent special circumstances.

See Meyer v. Holley, 537 U.S. 280, 285 (2003); Long Island

Sav. Bank, FSB v. United States, 503 F.3d 1234, 1250

(Fed. Cir. 2007) (explaining the general rule of imputation

of a culpable state of mind in the context of common-law

fraud). Congress is presumed to “inten[d] its legislation

to incorporate” traditional rules such as these. Meyer, 537

U.S. at 828.

In Long Island Savings Bank, this court recognized a

narrow exception—the adverse-interest exception—to the

general rule that a principal is liable for the acts of his

agent: when the agent’s conduct is “entirely” in the

agent’s interest without even incidental benefit to the

principal. See 503 F.3d at 1249–50. There, the agent used

his position to hire a law firm in which he had a secret

interest to perform legal services for his principal, a bank.

Id. at 1239. This court found that, because the bank

received services through the transaction (albeit, a taint-

ed transaction), the adverse-interest exception did not

apply. Id. at 1250. Here, as in Long Island Savings Bank,

whatever motivation Hall and Holmes had to accept

kickbacks from Tamimi, KBR received a benefit. As the

trial court put it: “KBR in fact benefitted by Messrs. Hall

and Holmes’s selection of Tamimi in that Tamimi did

provide necessary services to KBR—operating DFACs.” 24

24 Although the dissent agrees that respondeat supe-

rior applies under § 55(a)(1), it states that Hall and

Holmes’s knowledge should not be imputed to KBR be-

cause they acted adversely to KBR by taking the kick-

backs, and thus did not “benefit” KBR. Dissenting Op. at

3. However, the dissent’s agreement that respondeat

superior applies to § 55(a)(1) necessarily means an em-

ployer (who does not know of kickbacks) can be liable for

an employee’s knowing acceptance of kickbacks. See Long

Island Sav. Bank, 503 F.3d at 1249–50 (holding the

38 KELLOGG BROWN & ROOT SERVICES v. US

KBR I, 99 Fed. Cl. at 506 (internal quotation marks and

citation omitted).

KBR argues that a different set of rules apply here

because the AKA imposes punitive liability: “‘The common

law has long recognized that agency principles limit

vicarious liability for punitive awards.’” KBR Reply Br. 55

(quoting Kolstad v. Am. Dental Ass’n, 527 U.S. 526, 541

(1999)).

KBR argues that Kolstad stands for the proposition

that vicarious liability may give rise to liability under

section 55(a)(1) only when the agent serves in a “manage-

rial capacity.” Kolstad involved punitive damages under

Title VII for instances of intentional discrimination. It

was not an AKA case, and its rule should not be extended

to the AKA context for a number of reasons, not the least

of which is that a “punitive” damage award is distinct

from the type of damages provided by the AKA. Kolstad

grounded its holding in the Restatement (Second) of

Agency § 217 C (1957), explaining that the Restatement

limits when “an agent’s misconduct may be imputed to

the principal for purposes of awarding punitive damages.”

527 U.S. at 542. However, these limits do not apply to

“the interpretation of special statutes” like those giving

“triple damages.” Restatement (Second) of Agency § 217

C, cmt. (c) (1957). The “special statute” here, the AKA,

with its double damage provision, does not involve puni-

tive damages as that term was used in the statute at

issue in Kolstad; the AKA is outside of the scope of

Kolstad and the Restatement’s heightened standard for

vicarious liability.

agent’s knowledge was imputed to the principal in spite of

the Court of Federal Claims’s finding that the agent had

“abandoned his principal’s interest” and was “acting to

defraud his principal”).

KELLOGG BROWN & ROOT SERVICES, v. US 39

Accordingly, the Court of Federal Claims’s determina-

tion that Hall and Holmes’s knowledge should not be

imputed to KBR is reversed and remanded with instruc-

tions to calculate damages consistent with the holding

that KBR is liable for AKA violations under section

55(a)(1). 25

4. The Court of Federal Claims Correctly Held KBR Was

Not Liable for Common-Law Fraud.

This court stated in Godley v. United States, 5 F.3d

1473, 1476 (Fed. Cir. 1993):

. . . the general rule is that a Government contract

tainted by fraud or wrongdoing is void ab initio . .

. . A contract without the taint of fraud or wrong-

doing, however, does not fall within this rule. Il-

legal acts by a Government contracting agent do

not alone taint a contract and invoke the void ab

initio rule. Rather, the record must show some

causal link between the illegality and the contract

25 See also United States v. Kellogg Brown & Root

Services, Inc., No. 12-40447, 2013 WL 3779225 (5th Cir.

July 19, 2013) (holding that a corporation can be held

vicariously liable under section 55(a)(1) of the AKA and

remanding the case to the district court to determine

whether KBR officials acted under apparent authority in

accepting kickbacks for the purposes of a knowing viola-

tion of the AKA). Holding KBR vicariously liable for Hall

and Holmes’s conduct and state of mind requires the

subsidiary finding that Hall and Holmes were acting

within the scope of their employment, a question of fact.

No remand is required in this case, however, because the

trial court already found that Hall and Holmes were

acting “as KBR employees and operating under LOGCAP

III” when they accepted the kickbacks. KBR II, 103 Fed.

Cl. at 772. This finding was not clearly erroneous.

40 KELLOGG BROWN & ROOT SERVICES v. US

provisions. Determining whether illegality taints

a contract involves questions of fact.

It therefore fell to the Government to prove the causal

link between the kickbacks and the contract provisions.

The trial court’s finding that no such causational link

existed is reviewed for clear error. Ind. Mich. Power Co.,

422 F.3d at 1373.

Following trial, the Court of Federal Claims found

that KBR would have awarded the Anaconda subcontract

to Tamimi even “absent any participation by Messrs. Hall

and Holmes.” KBR II, 103 Fed. Cl. at 779. The Govern-

ment argues that this “but-for test, rather than a causal

connection test,” was incorrect and that the Court of

Federal Claims found ample facts to support an overall

finding of common-law fraud, such as “the factual finding

that KBR employees receiving kickbacks played signifi-

cant roles in the award of the Tamimi subcontract, includ-

ing intervening with other KBR employees to ensure that

Tamimi received the Camp Anaconda DFAC contract,

rather than another contractor, as first intended.” Gov’t.

Br. 3, 46.

The Court of Federal Claims found those facts. How-

ever, the Government does not dispute the Court of Fed-

eral Claims’s overall finding that notwithstanding the

kickbacks at issue, the subcontracts would still have been

awarded to Tamimi. This court’s precedent confirms that

common-law fraud is not established simply by showing

that kickbacks were paid to personnel involved in contract

decision making: “Illegal acts by a Government contract-

ing agent do not alone taint a contract . . . . Rather, the

record must show some causal link between the illegality

and the contract provisions.” Godley, 5 F.3d at 1476.

Godley, on which the Government relies, Gov’t. Br.

55–57, demonstrates that fraud must be a but-for cause of

the outcome to satisfy the requirements of common-law

fraud. There, a property owner contracted to build a post

KELLOGG BROWN & ROOT SERVICES, v. US 41

office to lease to the U.S. Postal Service. When the Gov-

ernment later learned a subcontractor on the project had

bribed the decision maker, it sought to void the contract.

Because the case was before this court on summary

judgment, it was remanded since the court could not

“determine whether [the] illegal conduct caused any

unfavorable contract terms,” equating that inquiry with

“determin[ing] whether [the] illegal conduct tainted the

contract.” 5 F.3d at 1476 (emphasis added); accord id. at

1475 n.1 (quoting K&R Eng’g Co. v. United States, 616

F.2d 469 (Ct. Cl. 1980) (stating that contracts are “tainted

by illegality” when they are “‘the product of a conflict of

interest’”) (emphasis in original)).

The Court of Federal Claims found facts both against

and supporting a finding of common-law fraud. For

example, with regard to WR 3, the Court of Federal

Claims found that Hall and Holmes were responsible for

WR 3’s price estimate and statement of work, and they

overrode the initial decision of KBR’s procurement au-

thorities to award the work release to a different contrac-

tor. 26 However, the Court of Federal Claims also found

26 As discussed in the Background section, the Court

of Federal Claims stated:

Initially, Mr. Petsche considered simply relocating the

TES team that had already been mobilized for the work at

Kirkuk to Camp Anaconda. Although the evidence ulti-

mately showed that the decision to use Tamimi was sound

and practically justified, the court found Mr. Petsche’s

testimony credible that this idea [of using TES] was met

with strong resistance by Messrs. Hall and Holmes in

Food Service, both of whom advocated retaining Tamimi

at Camp Anaconda. Eventually, Mr. Petsche relented, and

on July 20, 2003, he authored a justification memoran-

dum supporting Tamimi’s retention as the vendor at

Camp Anaconda.

42 KELLOGG BROWN & ROOT SERVICES v. US

that “ample evidence supports a finding that Tamimi

would have received the award of the work at Anaconda

regardless of Mr. Hall’s actions,” crediting the testimony

of Mr. Jonas, KBR’s former Vice President for Procure-

ment Materials and Property, who testified that the

award of WR 3 to Tamimi “just made sense” and that it

“would have been irresponsible on the part of KBR at that

time” to attempt to use another subcontractor at Anacon-

da. KBR II, 103 Fed. Cl. at 779 (internal quotation marks

and citation omitted). Additionally, the Court of Federal

Claims found that “[t]he notion of awarding the work at

all four DFACs at Anaconda did not originate with Mr.

Hall, but with Mr. [Jim] Spore,” then-Regional Project

Manager for Northern Iraq. Id.

Unlike Godley, this case is not before us on summary

judgment, and the Court of Federal Claims did determine,

as a finding of fact, that the illegal conduct overall did not

irreparably taint the contract, i.e., that “Tamimi would

have received a Master Agreement and WR 3 absent any

participation by Messrs. Hall and Holmes.” Id. We dis-

cern no clear error in this determination.

CONCLUSION

Because the Court of Federal Claims did not clearly

err in its calculations, we affirm its determination of

reasonableness of costs. We also affirm the dismissal of

the Government’s Special Plea in Fraud and False Claims

Act claims and the denial of the Government’s common

law-fraud claim. However, because the Court of Federal

Claims improperly calculated KBR’s base fee and erred

when it determined that the actions of KBR’s employees

should not be imputed to KBR, for purposes of the Gov-

ernment’s AKA claims, those claims are reversed and

remanded for further proceedings.

KBR II, 103 Fed. Cl. at 723–24.

KELLOGG BROWN & ROOT SERVICES, v. US 43

AFFIRMED IN PART, REVERSED IN PART, AND

REMANDED

United States Court of Appeals

for the Federal Circuit

______________________

KELLOGG BROWN & ROOT SERVICES, INC.,

Plaintiff-Appellant,

v.

UNITED STATES,

Defendant-Cross Appellant.

______________________

2012-5106, -5115

______________________

Appeal from the United States Court of Federal

Claims in No. 09-CV-351, Judge Christine O.C. Miller.

______________________

NEWMAN, Circuit Judge, concurring in part, dissenting in

part.

Although the decision of the Court of Federal Claims

is subject to controversy, for KBR provided substantial

evidence that its arrangements with subcontractors to

feed and accommodate a wartime Army were reasonable

in view of the “constantly changing demands” of the

Army’s activities in the Iraq war, the Court of Federal

Claims made a full and careful analysis. 1 The trial court

acknowledged the “fluctuating projections” and “unfore-

seeability” of the needs and facilities demanded of KBR,

1 Kellogg Brown & Root Servs., Inc. v. United

States, 103 Fed. Cl. 714, 773 (Fed. Cl. 2012).

2 KELLOGG BROWN & ROOT SERVICES v. US

and there was no suggestion that KBR profited unduly

from the erratic demands of the escalating war in Iraq. I

concur in the conclusion that the trial court’s analysis is

supportable.

However, unlike the panel majority, I would also af-

firm the trial court’s ruling that the actions of KBR’s

employees Hall and Holmes who accepted favors totaling

$38,000 from a sub-contractor should not invoke the

double penalty provision against KBR. There was no

evidence that KBR “received a benefit” from these bribes

to its employees, as the majority holds, maj. op. at 37, or

had knowledge of the kickbacks at the time. Thus al-

though I affirm the judgment of the Court of Federal

Claims that KBR is strictly liable to pay the government

this sum under 41 U.S.C. §55(a)(2), I would not impose

the doubled penalty under §55(a)(1). To this extent, I

respectfully dissent.

DISCUSSION

As defined in the Anti-Kickback Act (AKA):

The term “kickback” means any money, fee, com-

mission, credit, gift, gratuity, thing of value, or

compensation of any kind that is provided to a

prime contractor, prime contractor employee, sub-

contractor, or subcontractor employee to improp-

erly obtain or reward favorable treatment in

connection with a prime contract or a subcontract

relating to a prime contract.

41 U.S.C. §52(2). 2 The AKA provides for two levels of

liability of employers whose employees accept bribes or

favors of any kind. Under 41 U.S.C. §55(a)(2), the em-

ployer is strictly liable to the United States for the specific

value of any kickback received by an employee. Under

2 Congress re-codified the AKA without substantive

change, placing it at 41 U.S.C. §§8701–07.

KELLOGG BROWN & ROOT SERVICES, v. US 3

§55(a)(1), the employer is subject to an additional “civil

penalty,” for a total liability of twice the amount of each

kickback, and a cap of $10,000 (now $11,000) per kickback

event, if the employer had knowledge of the kickback.

Both liability levels arise under the “doctrine of re-

spondeat superior,” 132 Cong. Rec. S16, 311 (daily ed.

Oct. 15, 1986) (statement of Sen. Carl Levin), whereby

under general principles of agency law, principals are

charged with liability of their agents’ malfeasance “except

where the agent is acting adversely to the principal.”

Restatement (Second) of Agency §275 (1958). However, a

“principal is not affected by the knowledge of an agent in

a transaction in which the agent secretly is acting ad-

versely to the principal and entirely for his own or anoth-

er’s purposes.” Restatement (Second) of Agency §282

(1958).

According to the majority’s ruling, KBR as employer is

charged with imputed knowledge of the kickbacks, and

thus of liability for the double civil penalty, although it

appears undisputed that KBR did not have actual

knowledge. The majority states that KBR “received a

benefit” from the kickbacks because Tamimi performed

DFAC services under its existing contractual obligations.

Maj. op. 37. This ruling erases the distinction between

the two statutory levels of liability in the AKA. An exist-

ing contractual relationship is a prerequisite for liability

under the AKA definition of “kickback.” See 41 U.S.C.

§52(2), supra, (defining kickback as payments etc. “in

connection with a prime contract or a subcontract”); see

also Black’s Law Dictionary (9th ed. 2009) (a “kickback” is

“A return of a portion of a monetary sum received . . . .”

(emphasis added)). The majority’s reasoning fails to

recognize this inconsistency.

KBR acquiesced in its statutory strict liability under

§55(a)(2), for the $38,000 that the subcontractor paid to

KBR employees Hall and Holmes. KBR Reply Br. 6. The

4 KELLOGG BROWN & ROOT SERVICES v. US

Court of Federal Claims held KBR not liable under

§55(a)(1) for the doubled penalty because KBR’s manage-

ment had no knowledge of these illicit payments and KBR

did not benefit from them; this is the ruling that the panel

majority reverses.

There was no evidence that the bribes paid to Hall

and Holmes were known to KBR or were of benefit to

KBR. Hall and Holmes kept the entire payments for

themselves, as “party money” and for sham business

ventures. 103 Fed. Cl. at 721–22, 773–74. Although the

government suggests that the bribe-paying subcontractor

may have procured its sub-contracts at inflated prices,

this did not benefit KBR. No benefit to KBR has been

shown.

My colleagues have removed the distinction between

the two subsections of §55(a), by imposing the double

penalty provision of §55(a)(1) in circumstances that

invoke only the single strict liability provision of §55(a)(2).

The trial court’s ultimate and subsidiary factual findings

on this issue are not clearly erroneous, and the Court of

Federal Claims correctly limited KBR’s liability to

§55(a)(1). From my colleagues’ reversal of the Court of

Federal Claims’ ruling on this issue, I respectfully dis-

sent.