United States v. Savannah River Nuclear Solutions, LLC

United States of America, Plaintiff, v. Savannah River Nuclear Solutions, LLCand Fluor Federal Services, Inc., Defendants.

Civil Action No. 1:16-cv-00825-JMC

UNITED STATES DISTRICT COURT FOR THE DISTRICT OF SOUTH CAROLINA AIKEN DIVISION

December 6, 2016

ORDER AND OPINION

The Government filed a complaint against two government contractors, Defendants Savannah River Nuclear Solutions, LLC ("SRNS") and Fluor Federal Services, Inc. ("FFS"), raising six claims for relief, including three counts pursuant to the False Claims Act ("FCA"), 31 U.S.C. § 3729, et seq., and three counts asserting common-law liability. (ECF No. 1.) Before the court is Defendants' motion to dismiss the Government's complaint pursuant to Fed. R. Civ. P. 12(b)(1) and (6). (ECF No. 21.) For the reasons that follow, the court GRANTS Defendants' motion to dismiss IN PART and DENIES it IN PART.

I. FACTUAL AND PROCEDURAL BACKGROUND¹

A. Factual Background

In March 2007, the U.S. Department of Energy ("DOE") issued a request for proposals ("RFP") to prospective offerors for award of a management and operations contract ("M&O contract") at the Savannah River Site, a DOE facility that processes and stores nuclear materials and is dedicated to environmental management and cleanup of the facility. (ECF No. 21-3 at 2-3.)Under clause H-20, titled "Home Office Expenses," the RFP provided that "[h]ome office [('HO')] expenses, whether direct or indirect, relating to the activities of the Contractor are unallowable, except as otherwise specifically provided in the Contract or specifically agreed to in writing by the [contracting officer ('CO')] consistent with [Department of Energy Acquisition Regulation (the 'DEAR')] 970.3102-3-70, 'Home Office Expenses.'" (ECF No. 21-3 at 63; see id. at 4 (executive summary of the RFP).) Under clause I.51(j), titled "Determining allowable costs," the RFP also provided that the CO "shall determine allowable costs in accordance with the Federal Acquisition Regulation [(the 'FAR')] subpart 31.2 and the [DEAR] subpart 48 CFR 970.31." (ECF No. 21-4 at 26.) The subpart cited by the RFP states that "Independent Research and Development Bid and Proposal [('B&P')] costs are unallowable." 48 C.F.R. § 970.3102-05-18; (see ECF No. 1 at 8 (citing subpart and analogous clause in M&O contract).)

The M&O contract was awarded to SRNS, which signed the contract on June 16, 2008, and commenced performance on August 1, 2008. (ECF No. 1 at 3, 6; ECF No. 21-2 at 7; ECF No. 21-5 at 2, 4-5.) The M&O contract is a cost-reimbursement contract, which means that SRNS would be reimbursed for actual costs it incurred in furtherance of performing work under the contract—so long as those costs are allowable—and would earn a fee that represents its profits. (ECF No. 1 at 6.) To receive its reimbursement for allowable costs, SRNS would "collect[] and consolidate[] invoices associated with its contract work scope" and draw daily upon a letter of credit to pay for those invoices. (Id. at 6-7.) From August 1, 2008, to December 31, 2015, using this method of reimbursement, "SRNS claimed and received more than $8 billion from [the] DOE under the M&O contract in reimbursement for its incurred costs." (Id. at 7.)

The M&O contract contained both clauses H-20, the clause regarding HO expenses, and I.51(j), the clause incorporating regulations regarding B&P costs, which were included in the RFP.(ECF No. 21-5 at 62; ECF No. 21-6 at 73.) Although not specifically mentioned in the RFP or in the M&O contract, the Government alleges, and Defendants agree, that "SRNS was authorized to enter into loaned employee agreements with its owners and their affiliates," such as FFS, under a practice known as "corporate reachback."² (ECF No. 1 at 9.) As the complaint states,

[t]he purpose of the loaned employee agreements is to allow for "reachback" to the SRNS member companies' employee pool for critical skills needed in the performance of the M&O contract at the Savannah River Site. The practice of using loaned employees has come to be known as "corporate reachback."

Corporate reachback consists of an intra-company human resources cost transfer and is not a subcontract with an outside source. As an acceptable and approved human resources technique, personnel are loaned pursuant to a cost transfer agreement and not a procurement (sub) contract.

(Id.)

SRNS and FFS entered a cost transfer agreement ("CTA") on December 22, 2008, which governed the corporate reachback program as between SRNS and FFS and specifically established procedures "for invoicing of costs incurred for [FFS] to provide personnel support" and for FFS "home office personnel who perform SRNS work" and "for processing and paying FFS invoices." (ECF No. 21-7 at 2.) In a clause titled "Reimbursement for Labor Costs," the CTA provided that "SRNS shall reimburse FFS for actual direct labor costs and associated indirect burdens," including "[o]verhead charges." (Id. at 3-4.) The CTA further provided, in a clause titled "Reimbursement for Expenses of Home Officer Personnel," that "allocations of home office expenses to FFS Loaned Employee costs are unallowable in accordance with the provisions of the [M&O c]ontract." (Id. at 5.) The same clause provided that, "[n]otwithstanding the above, SRNS will reimburse FFS for the costs of FFS personnel who are not Loaned Employees . . . who perform work in support of SRNS." (Id.)

In May 2010, SRNS's president, who was also a reachback employee of FFS, wrote a letter to the DOE, notifying it that SRNS and FFS were processing corporate reachback employee costs in accordance with the CTA. (ECF No. 1 at 10.) The Government alleges that Defendants "knew this statement was false" and "were knowingly charging both [HO] expenses and [B&P] costs to the DOE in direct violation of the [CTA] and . . . the M&O contract." (Id.)

On April 20, 2011, SRNS managers, some of whom were FFS reachback employees, received an internal audit report regarding the reachback program and the reimbursement for FFS employees performing work for SRNS under the CTA. (Id. at 11; ECF No. 21-8 at 7.) The reportconcluded that the portion of the CTA providing that SRNS would reimburse FFS for FFS personnel who are not loaned employees and who perform work in support of SRNS was inconsistent with clause H-20 of the M&O contract. (ECF No. 21-8 at 28.)³ In a response, which is incorporated into the report, SRNS management did not concur with the report's conclusion, asserting instead that the allocability and allowability of HO expenses are governed by the Cost Accounting Standards (the "CAS") found in the FAR, 48 C.F.R. ch. 99, subch. B, pt. 9904. (Id. at 29.) Under the CAS, SRNS management continued, "these questioned costs for Corporate Support are not an allocation of [HO] Expense, but are directly allocable and allowable costs that support work processes required by [the M&O c]ontracts but are performed in a location other than the Savannah River Site. Therefore, these costs questioned are allowable." (Id. at 29.) In short, SRNS management stated that they "fundamentally disagree[d] that these costs should be categorized as [HO] Expense. (Id. at 30.)

On May 20, 2011, an SRNS officer, Greg Ahlstrom, contacted the DOE, informing it that no FFS HO expenses were being billed to the DOE, but "insist[ing] that [FFS] did not believe that [FFS] loaned employee expenses met the definition of [HO] expenses prohibited by the M&O contract." (ECF No. 1 at 12.) The Government alleges that Ahlstrom's communication was"false[]" and that he "did not inform [the] DOE that this interpretation was in direct contradiction to the [CTA] . . . and was in direct contradiction to the findings of, and management response to, the . . . internal audit [report]." (Id.) Following Ahlstrom's communication, the DOE initiated its own audit to determine whether any costs charged pursuant to the reachback program were unallowable. (Id.)

On January 31, 2012, SRNS and FFS modified the CTA by replacing the language stating that "allocations of [HO] expenses to FFS Loaned Employee costs are unallowable" to language stating that "allocations of [HO] expenses to the SRNS segment costs are unallowable." (Id. at 13 (internal quotation marks omitted).) The Government alleges that this modification was done "secretly" and that Defendants "knew that this change was directly at odds with the original meaning and intent of the [CTA] and . . . with the explicit contractual and regulatory provisions pertaining to [HO] expenses billed to [the] DOE." (Id.)

On May 21, 2012, SRNS forwarded to the DOE an internal audit that "review[ed] . . . expenses and burdens applied to the corporate reachback employee[s] working at SRNS." (Id. (internal quotation marks omitted).) The Government alleges that this communication was "the first time [the DOE] had actual evidence that [HO] expenses were being included in incurred costs submissions and billings to [the] DOE." (Id. at 14.)

Between July and October 2012, an auditing firm brought in by the DOE's Office of Inspector General ("OIG") conducted an "audit of [HO] expenses submitted by FFS." (ECF No. 21-2 at 7.) The OIG report, issued October 10, 2012, concluded that "[SRNS]'s costs incurred for [the M&O contract], for the period August 1, 2008 through August 21, 2012, included [HO] expenses of $1,256,481 . . . resulting from its use of [FFS] loaned employees." (Id. at 8, 22.) In January 2013, following the issuance of the OIG report, the DOE CO "issued a finding that allhome expenses . . . billed to [the] DOE through the corporate reachback program . . . were unallowable." (ECF No. 1 at 14.) In April 2015, the DOE sent SRNS a cease-and-desist letter, demanding that SRNS discontinue its billing of HO expenses to the DOE under the M&O contract. (Id.)

On March 14, 2016, the Government filed a complaint against Defendants in this court, alleging the factual background outlined in the above paragraphs, as supplemented by the documents the...