United States ex rel. DRC, Inc. v. Custer Battles, LLC: a Brutal Battle Foreshadowing the Future of False Claims Act Litigation

Kathleen H. Harne

In United States ex rel. DRC, Inc. v. Custer Battles, LLC (DRC IV), the United States Court of Appeals for the Fourth Circuit considered whether a contractor was liable under the False Claims Act (“FCA”) for submitting fraudulent claims to the Coalition Provisional Authority (“CPA”) in Iraq. The court, reversing in part and remanding the lower court's decision, held that all of the fraudulent claims presented by the contractor, including those paid out of the Development Fund for Iraq (“DFI”), qualified under the FCA for two primary reasons. First, the United States had contributed a portion of funds that became part of the DFI, a source of funds belonging to the Iraqi people. Second, a jury could reasonably conclude that U.S. Government contracting officers assigned to the CPA constituted U.S. employees acting in their official capacity. In so holding, the Fourth Circuit erroneously ignored precedent by extending the FCA to claims where U.S. funds were absent. By neglecting to employ an instrumentality test, the court failed to recognize that the CPA was a non-U.S. instrumentality whose employees could not implicate the FCA's presentment requirement. Finally, the Fourth Circuit distorted the restitutive purpose of the FCA.

If the Fourth Circuit had applied traditional FCA analysis, it would have avoided an alarming expansion of the FCA, thereby preventing contractor uncertainty and evading surrender to overarching U.S. political interests in a unique international situation. Moreover, the court would have provided less clout to Congress's subsequent approval of imprudent amendments to the FCA under the Fraud Enforcement and Recovery Act of 2009 (“FERA”). Instead, Custer Battles foreshadowed Congress's complete overhaul of the FCA through amendments that now destroy the vital nexus between the U.S. Government and the contractor, create limitless liability, and erode the FCA's original purpose of providing restitution to the U.S. Government.