Third Circuit affirms dismissal of False Claims Act suit, citing contract ambiguity


Ambiguous contract terms are ordinarily a liability for government contractors, opening the possibility of misunderstandings, expensive disputes, and, potentially, unpaid additional work. However, contract ambiguity recently came to the aid of a federal contractor accused of False Claims Act (“FCA”) violations. The U.S. Court of Appeals for the Third Circuit upheld dismissal of a suit alleging FCA violations by a contractor for the Pennsylvania Department of Transportation, holding that internally contradictory and vague contract language defeated the possibility of a jury finding of requisite intent for an FCA violation.

The qui tam plaintiff, August W. Arnold, alleged in his complaint that CMC Engineering Inc. overcharged PennDOT for the services of inspectors who worked on federally-funded highway projects. Arnold, a former PennDOT assistant construction engineer, helped oversee selection of private engineering firms for PennDOT. In his complaint, Arnold contended that CMC knowingly misrepresented the qualifications of its inspectors to trigger higher pay rates than were appropriate given the inspectors’ actual qualifications.

Having reviewed the language of PennDOT’s contracts with CMC, the court concluded that the contracts contained several mutually contradictory pay-rate schedules. The court noted that the contracts were also ambiguous in allowing “any equivalent combination of experience or training” as a substitute for at least some qualifications. PennDOT employees testified that this created “a big gray area” and that the contracts’ terms were “open to interpretation.” To violate the FCA, a defendant must have “knowingly” made a false claim or false certification. In this instance, the court held, a reasonable jury could not find CMC to have knowingly misrepresented the inspectors’ qualifications, given the uncertainty about what qualifications were really required for various pay rates. In short, where a defendant and a relator reasonably disagree about how to interpret ambiguous contract language, there may be ground for dismissal of an FCA claim.

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DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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