In a Qui Tam Case Where It Is the Real Party in Interest, the Government Can Be Responsible for the Contractor's Legal Fees Under the Spearin Doctrine
“Give a man a fish, he eats for a day. Teach a man a fish, he eats for a lifetime.”
- Anonymous
The Government has several avenues to pursue damages when a contractor commits fraud, including bringing its own False Claims Act (“FCA”) suit or joining a proxy qui tam lawsuit. But what happens when the Government’s mistake leads to a contractor’s damages? In The Tolliver Group v. United States, COFC No. 17-1763C, the Tolliver Group invoked the so-called Spearin doctrine to recover legal fees from an erroneous qui tam lawsuit.
What started out as a simple fixed-cost contract for providing technical manuals to the Army became more complicated when the Army failed to provide a technical data package with engineering drawings. This made it more difficult for the contractor because it required them to reverse engineer the vehicle. As a result, the Army and Tolliver executed a contract modification removing the Government’s obligation to provide the technical data package as well as changing the firm-fixed-price, level of effort contract to a firm-fixed-price contract at an increased cost of $6.45 million. So far, this was a fair agreement with the Government compensating the contractor for a larger scope of effort. However, a relator brought a qui tam lawsuit against Tolliver because the modification was incongruous with the Performance Work Statement (“PWS”). Despite the legality of the modification, it opened the contractor up to a qui tam lawsuit, although not a successful one.
The relator claimed that since the contractor performed work on the technical manuals before the modification was official, they violated the FCA. The contractor asked the Government to intervene in the case because the missing data package was its mistake. The Government refused, although recognized that the lawsuit was without merit. After defeating the lawsuit, the contractor submitted a claim under the Contract Disputes Act for an equitable adjustment. It was subsequently denied by the Contracting Officer because the claim was filed under a fixed price contract.
Usually, this is the correct answer because it is difficult if not impossible for contractors to recover unexpected costs on a fixed price contract. However, this case was unique because it was the Government’s fault that the contractor could not perform in a manner consisted with the PWS. Tolliver sued under the Spearin doctrine which allows for cost recovery where the Government breached an implied warranty that the contractor will be able to perform satisfactorily if it adheres to the specification in the contract. Franklin Pavkov Constr. Co. v. Roche, 279 F.3d 989, 994-95 (Fed. Cir. 2002) (citing Spearin, 248 U.S. at 136). Tolliver proved that the lack of a technical data package was a mistake caused by the Government, and that it was the proximate cause of the legal fees incurred in defending against the qui tam relators suit. This was because the omission of the data package was the basis for the relator’s assertion that the contractor was not following the PWS. The qui tam suit by its nature is a suit in the name of the Government for fraud, and so the Government has responsibilities related to that litigation and can be a big beneficiary of any recovery.
The Government listed two major defenses to the fee claim – first, that fixed price contracts do not allow for cost reimbursement, and second that the Spearin doctrine bars costs associated with third-party claimants (i.e., private lawsuits). The Court of Federal Claims dispensed with the first defense by drawing a parallel to the contractor in the Spearin case who was also performing under a fixed price contract. As to the second defense, the government relied on the Hercules limitation which states that contractors are barred from cost recovery for third-party claims. In Hercules, Inc. v. United States, 516 U.S. 417, 424-25 (1996), the contractor was seeking recovery for litigation costs for defending lawsuits from veterans who had been injured by the chemicals in Agent Orange. But here the court distinguished third party claims from qui tam lawsuits where the Government bears an interest in the lawsuit. Since the Government is the real party in interest in qui tam suits, Tolliver was not seeking costs associated with a third-party suit. Rather, the costs were incurred in defending an action brought in the name of the United States of America.
There are a couple of conclusions that we can draw from the success of the Tolliver Group. The first is that there is an established body of law protecting the contractor from mistakes that the Government makes during the contractor’s performance. While the Government did their best to adjust to Tolliver’s needs when they were unable to provide the technical data, that is not always the case. In addition, the Hercules limitation now does not bar costs associated with the FCA, and this decision could expand that to other situations where the Government has a primary interest in the third-party suit. Having said that, qui tam suits are a bit unique and it may be difficult to find an analogous situation where this decision can be expanded upon. The ruling is also a warning; in contract law, parties should attempt to mitigate costs if there is a breach. The Court of Federal Claims didn’t seem to think that “general policy” was a good enough reason for the Army not to intervene in the qui tam suit and instead simply to sit back and cost Tolliver a couple of hundred thousand dollars in legal fees.