Fifth Circuit decision exposes contractors to vicarious liability for double damages when employees receive personal kickbacks

In a case of first impression with potentially far-reaching consequences, the Fifth Circuit has ruled that a contractor may be held vicariously liable for double damages under the Anti-Kickback Act (AKA), even when the kickback is taken by an employee, not the contractor — United States ex rel. Vavra et al v Kellogg Brown & Root Inc, No. 12-40447 (5th Cir. Jul. 19, 2013). Thus, having first been victimised by a dishonest and disloyal employee, a contractor may then also suffer enhanced civil penalties in a lawsuit by a qui tam relator and/or the Department of Justice. The decision significantly raises the stakes for contractors who fail to monitor their employees or who, despite their best efforts, fall victim to employee self-dealing.

The case arose in connection with KBR’s contract to provide support services to the US military in Afghanistan and Iraq. Two KBR employees who administered subcontracts for freight transportation later pled guilty to criminal charges arising from their acceptance of kickbacks from shipping companies, in the form of meals, tickets to sports events, golf outings and other gifts and entertainment. A qui tam relator, later joined by the Department of Justice, filed a civil suit against KBR alleging violations of the federal AKA. The government sought enhanced damages from KBR — twice the amount of the kickbacks plus up to $11,000 (£7,000) per kickback. The lower court ruled that KBR was not liable for those enhanced penalties where the kickbacks were received not by the company but by lower-level employees for their personal benefit. The Fifth Circuit reversed, rejecting arguments that violations could be imputed to the employer only if the kickbacks were intended to benefit the company or were known at a higher level of management…

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