United States District Court, C.D. Illinois, Rock Island Division
UNITED STATES, ex rel. THOMAS WATKINS, Plaintiff/Relator,
KBR, INC., and KELLOGG BROWN & ROOT SERVICES, INC., Defendants.
ORDER & OPINION
JOE BILLY McDADE, Senior District Judge.
This matter is before the Court on Defendants' Motion to Dismiss Complaint (Doc. 37). The Complaint (Doc. 1) consists of a single count alleging violations of the False Claims Act, 31 U.S.C. § 3729 et. seq. (the "FCA"). Defendants assert that the Complaint should be dismissed under Federal Rule of Civil Procedure 12(b)(6) because the Relator has failed to plead viable theories of actionable fraud under the FCA. Defendants also assert that the Complaint's allegations have not been pled with sufficient particularity as required by Rule 9(b) of the Federal Rules of Civil Procedure. For the reasons stated below, Defendants' motion (Doc. 37) is GRANTED.
Under Federal Rule of Civil Procedure 8(a)(2), a complaint must include "a short and plain statement of the claim showing that the pleader is entitled to relief." The complaint must "give the defendant fair notice of what the claim is and the grounds upon which it rests." Bell Atl. v. Twombly, 550 U.S. 544, 555 (2007).
"A motion under Rule 12(b)(6) challenges the sufficiency of the complaint to state a claim upon which relief may be granted." Hallinan v. Fraternal Order of Police of Chicago Lodge No. 7, 570 F.3d 811, 820 (7th Cir. 2009). "In evaluating the sufficiency of the complaint, [courts] view it in the light most favorable to the plaintiff, taking as true all well-pleaded factual allegations and making all possible inferences from the allegations in the plaintiff's favor." AnchorBank, FSB v. Hofer, 649 F.3d 610, 614 (7th Cir. 2011). "To survive a motion to dismiss, the complaint must contain sufficient factual matter, accepted as true, to state a claim to relief that is plausible on its face." Indep. Trust Corp. v. Stewart Info. Servs. Corp., 665 F.3d 930, 934-35 (7th Cir. 2012) (citing Ashcroft v. Iqbal, 556 U.S. 662 (2009)) (internal quotation marks omitted). "The complaint must actually suggest that the plaintiff has a right to relief, by providing allegations that raise a right to relief above the speculative level." Id. at 935 (citing Windy City Metal Fabricators & Supply, Inc. v. CIT Tech. Fin. Servs., 536 F.3d 663, 668 (7th Cir. 2008)) (internal quotation marks omitted). "[A] plaintiff's claim need not be probable, only plausible." Id. "To meet this plausibility standard, the complaint must supply enough fact[s] to raise a reasonable expectation that discovery will reveal evidence supporting the plaintiff's allegations." Id. (citing Twombly, 550 U.S. at 556) (internal quotation marks omitted)).
Rule 9(b) imposes a higher pleading standard than that required under Rule 8. See Pirelli Armstrong Tire Corp. Retiree Med. Benefits Trust v. Walgreen Co., 631 F.3d 436, 446 (7th Cir. 2011). "The [False Claims Act] is an anti-fraud statute and claims under it are subject to the heightened pleading requirements of Rule 9(b)." United States ex rel. Gross v. AIDS Research Alliance-Chicago, 415 F.3d 601, 604 (7th Cir. 2005). Rule 9(b) requires a pleading to state with particularity the circumstances constituting the alleged fraud. See Fed.R.Civ.P. 9(b); Pirelli, 631 F.3d at 441-42. This "ordinarily requires describing the who, what, when, where, and how' of the fraud, although the exact level of particularity that is required will necessarily differ based on the facts of the case." Hofer, 649 F.3d at 615 (citation omitted).
Relator, Thomas Watkins, joined defendant Kellogg Brown and Root Services Inc. ("KBRSI") in September 2004. In May 2005, he was assigned to the company's Baghdad, Iraq facilities as a Senior Manager, Accounting & Finance, Middle East/Central Asia, and became responsible for accounting functions under the LOGCAP III contract. Relator developed most of the procedures for accounting operations under the LOGCAP III contract. Relator resigned in March 2008. Prior to joining KBRSI, Relator had extensive accounting, finance, business, and management experience.
KBRSI is a wholly owned subsidiary of defendant KBR Inc. ("KBR"). KBR is a Delaware corporation with its principal place of business in Houston, Texas. KBR holds the LOGCAP III contract and has assigned responsibilities for that contract to KBRSI. KBRSI is also a Delaware corporation with its principal place of business in Houston, Texas.
The Logistics Civil Augmentation Program ("LOGCAP") was established in 1985 to facilitate civilian contractor logistical support for United States military forces deployed overseas, principally in countries with which the United States does not have treaties or agreements that would enable the host country to provide such support. Under the LOGCAP, a single company was awarded a contract to provide a wide range of logistical services. Each LOGCAP prime contract contains a Statement of Work describing generally the types of services to be provided by the LOGCAP contractor. The services provided under the LOGCAP include supply operations (such as the delivery of food, water, fuel, spare parts, and other items), field operations, such as dining and laundry facilities, housing, sanitation, waste management, postal services, and morale, welfare and recreation facilities, engineering and construction services, support to communication networks, transportation and cargo services, and facilities maintenance and repair.
LOGCAP contracts are awarded periodically. After a no-bid process, the United States awarded the third such contract, LOGCAP III, to Brown and Root Services, a division of KBR, in December 2001. Thereafter, KBR transferred the responsibilities for the LOGCAP III contract to KBRSI.
The LOGCAP III contract was awarded by the United States Army Field Support Command ("AFSC"), headquartered at Rock Island, Illinois. AFSC administered the LOGCAP III contract until September 2006, when United States Army Sustainment Command ("ASC") was created to succeed AFSC as the logistics integrator for contingency contracting. ASC, also headquartered in Rock Island, Illinois, succeeded ASFC as the administrator of the LOGCAP III contract.
The LOGCAP III contract had a one-year base period and nine one year renewal options. The United States recently awarded the LOGCAP IV contract to three contractors and has begun transitioning LOGCAP operations to LOGCAP IV. LOGCAP operations in Iraq, however, continue (as of the date of the filing of the Complaint) to be performed pursuant to the LOGCAP III contract.
The Government and the contractor execute task orders detailing particular operations or services that the contractor must furnish under each LOGCAP contract. Task Orders 59, 89, and 139 are the largest task orders under LOGCAP III. They require the contractor to satisfy a wide variety of the military's logistical needs in Iraq, including camp maintenance, construction, meals, and other services for as many as 130, 000 troops at dozens of camps. Army officials in Rock Island, Illinois issued Task Order 59 to KBR in August 2003, issued Task Order 89 to KBR in May 2005, and issued Task Order 139 to KBR in August 2006.
Defendants staffed Task Orders 59 and 89, and staff Task Order 139, principally with United States citizen workers, but KBR also employed and continues to employ a sizable number of European citizens to perform work under Task Orders 59, 89, and 139. KBR transports those workers to Baghdad, Iraq, and houses them there.
Pursuant to the terms of its agreement with the Government, KBR pays to return its employees and subcontractors' employees to their point of origin-usually their home or point of hire-for periodic vacations or at the termination of their employment. If employees wish to go somewhere other than their point of origin, KBR will pay up to the cost of transporting them to their point of origin, and the employees are responsible for paying any excess travel cost.
LOGCAP III is a cost reimbursement, award-fee contract. Pursuant to the contract, the Government pays KBR the cost of performing the contract. KBR's recoverable cost includes both the cost of performance and an additional percentage of those costs to cover expenses. The Government also pays a fixed "award fee" of one percent of the cost of performance, and up to an additional two percent of the cost as a performance incentive. Thus, in cost-reimbursement contracts such as LOGCAP III, contractors' fees rise with contract costs such that increased costs translate into increased fees to the contractor. The LOGCAP III contract and the task orders executed under it are governed by the Federal Acquisition Regulation ("FAR"), codified in Chapter 48 of the Code of Federal Regulations.
Task Orders 59, 89 and 139 provide that one allowable cost of the contract is the cost of rotating contractor employees into and out of the theater for periodic vacations and at the termination of employment. KBR refers to this as "repatriation and rotational leave." KBR has employed tens of thousands of people at a time in the theater of operations pursuant to Task Orders 59, 89, and 139. KBR is responsible for transporting those people to and from Iraq, both at the beginning and end of their employment and for periodic vacations during their employment. KBR transports hundreds of people into and out of Baghdad each day for repatriation and rotational leave.
Since 2004, KBR has arranged for charter flight service into and out of Baghdad for repatriation and rotational leave. KBR's chartered flights transport its personnel to and from hub airports in other countries, where KBR personnel can transfer to commercial flights to their point of origin or other destinations.
Prior to 2004, the Government did not allow private charters to fly into the Baghdad airport. KBR persuaded the Government to do so after providing detailed cost and pricing information demonstrating that private chartered air service would be less costly than ground convoys or the use of available space on military flights.
Pursuant to its repatriation and rotational needs under Task Orders 59, 89, and 139, KBR has chartered regular flights to and from Baghdad through hub airports in Dubai, United Arab Emirates and Kuwait, and has arranged or paid for further travel from those hubs. The vast majority of KBR personnel travel through Dubai for their repatriation and rotational leave.
Because of the limited number of flights into and out of Dubai and restrictions on the timing of charter flights out of Baghdad, KBR personnel traveling to or from Baghdad through Dubai generally have long layovers ranging from several hours to a full night. KBR arranges for lodging, meals for its employees and subcontractor employees during such layovers, and certain administrative processing necessitated by the layover in Dubai. The cost of food, lodging, and the travel operations staff needed to process KBR travelers in Dubai for over 40, 000 travelers per year is substantial. For example, in one twelve month period from mid-2005 to mid-2006, the cost to KBR of the Dubai layover was $84, 650, 000. Relator understands that KBR has incurred Dubai layover costs of similar magnitude throughout the duration of Task Orders 59, 89, and 139.
KBR has submitted invoices or vouchers to the United States seeking reimbursement of its claimed allowable repatriation and rotational leave costs under Task Orders 59, 89, and 139, including the cost of the Dubai layovers. The United States paid each such invoice or voucher claiming the costs of the Dubai layover, plus additional general and administrative costs, the one percent mandatory award fee applied to costs, and a portion of the remaining two percent discretionary award fee applied to costs.
In 2006, KBR solicited bids from vendors for charter flight service from Baghdad for repatriation and rotational leave beginning in January 2007, after the expiry of the prior charter aviation subcontract. KBR asked the vendors to bid on the existing Iraq-Dubai/Iraq-Kuwait schedule (the "Dubai Plan"), as well as an alternative Iraq-Frankfurt/Iraq-Dubai/Iraq-Kuwait schedule (the "Frankfurt Plan"). The Frankfurt Plan would continue to include flights to Dubai, albeit a reduced number of such flights.
According to the Relator, the addition of the Frankfurt route would allow KBR to transport most of its personnel to a hub airport with a wider and less-expensive range of options. Most KBR personnel traveling through Frankfurt would not require lodging, substantial meal expenses, or certain administrative processing before transferring to connecting flights. Thus, a Frankfurt transfer point would dramatically reduce the cost of KBR's repatriation and rotational leave travel costs. In addition, because transportation between Frankfurt and the United States or Europe is substantially less expensive than transportation between Dubai and those locations, a Frankfurt hub would result in additional substantial cost savings.
Four vendors submitted bids on the two proposed schedules. Two bids were disqualified. KBR deemed the remaining two bids, from Skylink Arabia (the incumbent charter carrier) and Ecolog AG, to be technically acceptable and in the competitive range. Skylink Arabia bid $45, 699, 066 per year to provide charter service pursuant to the Dubai Plan, or $68, 026, 140 per year pursuant to the Frankfurt Plan. Ecolog AG bid $35, 893, 566 per year to provide charter service pursuant to the Dubai plan, or $58, 683, 025 per year pursuant to the Frankfurt Plan.
While the cost of the charter service alone was more expensive under the Frankfurt Plan than under the Dubai Plan, Relator asserts that difference was far smaller than the savings that KBR would have realized under the Frankfurt Plan by eliminating most Dubai layover costs and enabling less expensive connecting flights. According to KBR's own June 2006 internal analysis, KBR expected to save approximately $75, 000, 000 realized over the term of a year by implementing the Frankfort Plan. Relator received a copy of that internal analysis in the ordinary course of his duties.
In June 2006, KBR convened a meeting to discuss the bids. Approximately fifteen KBR employees attended the meeting including: Jim Stapleton, Chief of Staff to Steve Arnold, KBR's Vice President and Program Manager for LOGCAP III; Mike Mayo, KBR's Deputy Program Manager for LOGCAP III Support; Neal Jackson, the Aviation Manager responsible for repatriation and rotational leave travel; Kelly Beaver, the Project Manager for KBR's Dubai Operations Center; Gary Steinke, the Subcontract Administrator who sent the June 2006 internal analysis to Relator; and Relator. KBR made copies of the June 2006 internal analysis available at the meeting.
During the meeting, Jackson, the person directly responsible for managing the cost of travel associated with repatriation and rotational leave, strongly advocated adoption of the Frankfurt Plan, with concurrence from some other participants. Beaver strenuously opposed the Frankfurt Plan. As head of KBR's Dubai Operations Center, Beaver had a vested interest in maintaining the status quo because his unit's responsibilities would be eliminated, or at least substantially diminished, under the Frankfurt Plan. At the close of the meeting, Mayo informed the participants that they would not proceed with the meeting and he instructed the participants to leave all materials distributed at the meeting on the table for collection, including the June 2006 analysis concluding that the Frankfurt Plan would save $75 million annually. Despite the savings that KBR expected to realize, KBR rejected the Frankfurt Plan. Instead, it retained the Dubai Plan, pursuant to which it continues to operate charter flights.
KBR submitted certain cost and pricing data to the Government in connection with the definitization of Task Orders 59, 89, and 139. " Definitization means the agreement on, or determination of, contract terms, specifications, and price, which converts the undefinitized contract action to a definitive contract." 48 C.F.R. § 217.7401(b). KBR also certified, as of the date of definitization of each of those task orders, that the cost or pricing data submitted to the Government were accurate, complete, and current as of the date of definitization. Task Order 59 was definitized in March 2005.
However, according to the Relator, the cost and pricing data KBR submitted were not "accurate, complete, and current" because KBR did not provide the Government with the June 2006 bid analysis that concluded the Frankfurt Plan would result in a substantial cost savings of approximately $75, 000, 000 realized over the term of a year, or the bid materials supporting that conclusion. Relator contends that KBR's failure to provide the Government with "accurate, complete, and current" information concerning the Frankfurt Plan was unlawful under the ...