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

United States District Court, C.D. Illinois, Rock Island Division

March 31, 2014

KELLOGG BROWN & ROOT SERVICES, INC., et al., Defendants.


SARA DARROW, District Judge.

Plaintiff United States of America claims that contractor Kellogg Brown & Root Services, Inc. ("KBR")[1] and its subcontractor, First Kuwaiti Trading Company (in its various incarnations, collectively "First Kuwaiti"), inflated the costs of providing living quarters for American troops in Iraq. KBR has moved to dismiss the Government's seven causes of action under Federal Rules of Civil Procedure 9(b), 12(b)(1), and 12(b)(6). Because the pleadings exhaustively present the issues under consideration at this procedural stage, KBR's Renewed Request for Hearing on Defendants' Motion to Dismiss, ECF No. 48, is DENIED. KBR's Motion for Leave to Reply to the Government's Response, ECF No. 30, is GRANTED. For the following reasons, KBR's Motion to Dismiss Complaint, ECF No. 24, is DENIED.


On December 14, 2001, the U.S. Army awarded the Logistics Civil Augmentation Program III ("LOGCAP III") contract to KBR for the provision of support services in the Iraqi military theater.[2] LOGCAP III is an umbrella contract for indefinite delivery of an indefinite number of services. The contract is performed through task orders which prescribe a specific scope of work. Much of KBR's work under LOGCAP III has been performed through subcontractors; KBR pays them for the actual cost of their services and seeks reimbursement from the Government for this amount, plus a 1% base fee and a discretionary award of up to 2%.

On August 27, 2003, the Army included support for Operation Bed Down[3] within KBR's LOGCAP III portfolio. KBR was to "provide, setup, operate and maintain" 2, 252 living trailers at Camp Anaconda in Iraq no later than December 15, 2003. On October 16, 2003, KBR awarded Subcontract 11 to First Kuwaiti to provide, deliver, and install 2, 252 living trailers at Camp Anaconda by December 15, 2003. Subcontract 11 provided that First Kuwaiti would not receive additional pay for expenses incurred as a result of delays caused by force majeure, but could receive allowances for "delays in convoy coordination and support." According to KBR Claims Group counsel David Brenner, "allowances" meant additional time, but not financial compensation. Before Subcontract 11 was awarded, First Kuwaiti and KBR both received the production schedule from First Kuwaiti's subcontractor, the manufacturer Red Sea Housing Services Co., Ltd. According to that schedule, Red Sea could only make and deliver 1, 645 living trailers to the Iraq border by December 15, 2003. Despite the terms of Subcontract 11, First Kuwaiti later presented several requests to KBR for equitable adjustment ("REA") of the subcontract price for delays that occurred.

I. Double Handling REA

In May and June 2004, First Kuwaiti submitted four REAs for "repair costs and double-handling" due to alleged Government-caused delays; these four REAs were later consolidated into a single REA totaling $30, 638, 102. First Kuwaiti claimed that it had to hold the trailers at temporary storage locations due to convoy and site-preparation delays. To accomplish this, First Kuwaiti leased land, cranes, and other equipment and hired personnel it otherwise would not have needed; the increased handling also resulted in damage to the trailers, which First Kuwaiti had to repair.

On December 30, 2003, First Kuwaiti gave KBR a price proposal of $647, 500 per month for leasing land and conducting operations at a temporary storage yard. Although KBR considered incorporating that rate into the claim it would later present to the Government for payment, internal emails reveal that KBR employees believed First Kuwaiti's price proposal was "exorbitant" and "unreasonable." In a July 3, 2004 email, KBR Government Operations Administrator Jay Patterson wrote that First Kuwaiti had been told "the price is too high" and that KBR was waiting for a "reasonable price." Later that day, KBR Property Manager for Iraq Donald Bailey replied that the price was "unreasonable" and stated that the price quoted by KBR in its Material Requisition should be based on a "fair price, " not necessarily the subcontractor's price. The Material Requisition KBR ultimately submitted was $115, 000 per month.

The Government also points to First Kuwaiti's claimed crane lease prices to further illustrate the unreliability of its alleged costs. In its double handling REAs, submitted to KBR in May and June 2004, First Kuwaiti originally claimed a cost of $20, 000 per month per crane to lease 14 extra cranes for a period of six to eight months. When KBR requested a more detailed cost breakdown, First Kuwaiti submitted a $23, 000 per month crane price. However, on June 10, 2004, KBR Material Control Supervisor Bret James emailed KBR Subcontract Administrator Jakob Matovinovic information to use as a "barometer" to measure the double handling REA- namely, First Kuwaiti's December 30, 2003 proposal, which indicated a crane price of $12, 000 per month.[4] On December 21, 2006, First Kuwaiti provided lease agreements for 11 of the 14 cranes to KBR Senior Manager for Government Compliance Theodore Needham III. Most of these leases indicated a price of $8, 250 per month. Despite repeated requests by Government officials for First Kuwaiti's actual costs, KBR did not submit the crane leases until May 11, 2012; KBR submitted First Kuwaiti's December 30, 2003 proposal and related emails on October 18, 2012.

KBR concluded that one-third to one-half of the repair costs in the double handling REA were unjustified because they represented double charging, were due to manufacturing defects, or overstated both the number and costs of repairs needed. On July 14, 2004, however, KBR offered to "settle" the repair costs for 25% less than First Kuwaiti initially claimed if First Kuwaiti agreed "ASAP." If not, First Kuwaiti effectively would be required to support its claim and any price adjustment would be limited to its actual costs. Soon after, KBR and First Kuwaiti settled the double handling REA for $23, 831, 147.25, which the Government claims included "millions of dollars more, " for cranes and repairs than was supported by First Kuwaiti's actual crane costs and KBR's independent evaluation, respectively. KBR billed and was reimbursed by the Government for this REA.

II. Delay REA

On July 15, 2004, First Kuwaiti submitted an REA for the costs of 83, 942 days of idle truck and driver time due to the delay, all of which it attributed to the Government. On August 4, 2004, First Kuwaiti submitted a revised REA and claimed its "actual costs" for the idle trucks and drivers, as supported by lease invoices and verified by KBR, was $500 per day. That same day, KBR Senior Subcontract Administrator Charles Hutchins issued a memorandum indicating that the $500 rate was First Kuwaiti's "actual cost" per day and that a KBR analyst had verified this rate.

In fact, the Government points to a June 21, 2005 letter from KBR to the Defense Contract Audit Agency ("DCAA"), in which KBR states that it "did not review [First Kuwaiti's] accounting records." The Government construes this as an acknowledgment that no KBR analyst had reviewed or verified the $500 rate based on invoices from First Kuwaiti's truck suppliers. Further, although Hutchins documented the $500 rate as First Kuwaiti's actual cost, he told First Kuwaiti that the rate was too high to be reasonable and KBR would only pay $300 per day-$200 per truck and $100 per driver. Further, as indicated by an internal December 31, 2003 email from KBR Regional Lead Contract Administrator James Ray, KBR knew that it was billing for costs of delay not attributable to the Government. At least some of the delay was attributable to First Kuwaiti because it contracted with Red Sea to provide 2, 252 living trailers at Camp Anaconda despite knowing Red Sea could only ship 1, 645 trailer units by the target date of December 15, 2003. Neither First Kuwaiti nor KBR excluded days attributable to this self-imposed delay from the REA-as well as delay days attributable to weather, force majeure, and other causes not compensable under the contract.

On December 21, 2006, First Kuwaiti gave its truck leases, with the rates redacted, to KBR. KBR did not seek unredacted leases, as it had the right to do under Subcontract 11. In February 2012, after repeated requests for REA-supporting data, KBR provided the redacted truck leases to the Government. Based on unredacted letter of credit information accompanying the leases, the Government claims it was able to calculate that First Kuwaiti's actual cost per truck was $47 or $60 per day. The Government maintains that, had KBR exercised its Subcontract 11 right to review unredacted leases and invoices, it too could have easily confirmed that First Kuwaiti paid only $47 or $60 a day for trucks.

Regarding the REA's claimed driver costs, KBR logistics supervisor Kay Williams informed Hutchins by August 4, 2004, that "the normal cost" of paying for a driver in that time frame was $50 to $100 round trip. The REA assumed a round trip would require five to seven days, making First Kuwaiti's daily rate for drivers $7 to $20, not $100 as claimed. Further discrediting First Kuwaiti's claim, convoy logs record at least two sets of drivers as participating in two different multi-day convoys simultaneously. Despite these cost and factual discrepancies, KBR and First Kuwaiti agreed to settle the delay REA for $24, 923, 400 based on 83, 078 delay days at $200 a day for trucks and $100 a day for drivers. KBR sought and received reimbursement from the Government based on this amount.

On August 31, 2004, KBR billed the Government $48, 754, 547.25 for its costs attributable to the double-handling and delay REAs, plus related fees and costs, which the Government paid in September 2004. By March 17, 2006, the DCAA had suspended and disapproved this payment as unsupported. However, an Administrative Contracting Officer ("ACO") at the Defense Contract Management Agency issued an Interim Determination provisionally reinstating $25, 564, 516 of the payment on December 29, 2006. On June 20, 2008, another ACO reversed the Interim Determination after concluding that the supporting information provided by First Kuwaiti lacked credibility because a kickback scheme between KBR and First Kuwaiti employees had come to light.[5] The final ACO decision on July 29, 2011, ordered KBR to refund the Government $21, 781, 512, thereby providing KBR only $3, 783, 005 in total reimbursement on the REAs. KBR appealed the final ACO decision to the Army Services Board of Contract Appeals ("ASBCA") in August 2011, but that action was dismissed without prejudice when the Government filed the instant fraud-based suit on November 20, 2012. Def.'s Mem. in Supp. Mot. Dismiss 6, ECF No. 25.

III. Summary

In total, the Government alleges that KBR made four false claims:

First, on August 31, 2004, KBR billed the Government $48, 754, 457.25 for the double handling and delay REAs combined, plus contractual fees, based on unverified information.

Second, KBR represented that First Kuwaiti's truck costs were "reasonable, " while failing to disclose the actual leases, leading to the ACO's December 29, 2006 Interim Determination ...

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