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Custer Battles Loses the Battle in the Court of Appeals

The Court of Appeals for the Fourth Circuit recently decided U.S. ex rel DRC, Inc. v. Custer Battles, LLC, in which is ruled in favor of a qui tam relator in a False Claims Act case arising out of fraud by a contractor hired to provide services in Iraq.

Defendant Custer Battles, LLC was a “risk management firm” that entered into a contract with the Coalition Provisional Authority in Iraq (the “CPA”) to provide the CPA with assistance for an initiative to replace the Iraqi currency, the dinar, which bore the portrait of deposed President Saddam Hussein, with new dinars that did not bear Saddam Hussein’s portrait. The day the contract was signed, the CPA paid Custer Battles a $3-million advance with a U.S. Treasury check funded by its “seized assets” account, consisting of funds physically located in Iraq but seized by U.S. and Coalition forces. During the course of performing the contract, Custer Battles submitted invoices to the CPA for another $12 million. The invoices were presented to U.S. personnel detailed to the CPA and paid from the CPA’s “Development Fund for Iraq,” which included funds from both U.S. and non-U.S. sources.

The qui tam relators alleged that Custer Battles violated the False Claims Act by submitting invoices for reimbursement of expenses that overstated the actual cost of services provided by Custer Battles. The lower court held that Custer Battles’ liability for violating the False Claims Act was limited to $3 million, since only the $3-million advance came from U.S. government funds, whereas the government had relinquished any control over the moneys it contributed to the Development Fund for Iraq. The lower court also found that the relators failed to prove that the FCA was violated because they did not establish that the invoices were presented to U.S. government employees or officers.

The Fourth Circuit reversed the lower court’s decision. It explained that “[s]o long as ‘any portion’ of a claim is or will be funded by U.S. money” given to a government grantee, such as the CPA, the full claim satisfies the definition of a claim as used in the False Claims Act. Thus, the lower court erred by considering each source of the CPA funds separately. In addition, the Fourth Circuit held that it was not necessary to show that the U.S. government had control over the funds given to a grantee, as long as the government provided any portion of the funds used by a grantee to pay claims. The Fourth Circuit also overturned the lower court’s decision that the relators failed to show that a false claim had been submitted to a U.S. government employee. It explained that the U.S. officials detailed to the CPA were functioning as employees of the U.S. government because they were hired and paid by the U.S. to do the jobs that they were doing at the CPA; therefore, submitting a claim to the CPA was the equivalent of submitting a claim to the U.S. government.

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