Warning! Danger Ahead for Public Entities

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Public entities are known to assert False Claims actions “to up the ante” to intimidate and aggressively address contractor construction claims. This strategy in the case of John Ross of Industrial Sheet Metal, Inc. (JRI) V. City of Los Angeles Department of Airports (LAWA), 29 Cal. App. 5th 378 (2018), backfired on the public entity, LAWA, in a big way and should serve as a warning to public entities about expanding claims to include False Claim actions. In this case, LAWA was awarded $1 in contract damages, its California False Claims Act (CFCA) claim was rejected by the jury as were JRI’s claims against LAWA. Despite losing on the substantive contract claims, the trial court found that JRI “prevailed in the action” under the relevant CFCA fee provision, Government Code 12652, subd. (g)(9)(B), regardless of JRI’s failure to prevail in the action as a whole. The California Appellate Court (hereinafter “Court”) affirmed the trial court’s finding.

The CFCA is analogous to the federal False Claims Act (FFCA; 31 U.S.C. 3729 et seq.). Since the CFCA is patterned on similar federal legislation, it was appropriate for the Court to look to precedent construing this similar federal act in interpreting the CFCA provisions. Accordingly, the Court looked at the False Claims Act cases for guidance in upholding the trial court’s decision in its determination that JRI was the “prevailing party” for determining an attorney’s fees award against LAWA.

Here, JRI and LAWA entered into a contract for JRI to build and provide four aircraft rescue and firefighting vehicles for airports owned and operated by LAWA. JRI provided and LAWA accepted and paid in full for trucks #3 and #4. Thereafter, LAWA terminated the contract and refused to pay for trucks #1 and #2 before they were physically delivered to LAWA. At that time, trucks #1 and #2 were substantially completed, and therefore JRI sought contractual payments of approximately $2 million from LAWA. However, LAWA filed a lawsuit against JRI for breach of contract demanding the return of the more than $2 million it had paid for trucks #3 and #4. JRI filed a separate breach of contract lawsuit against LAWA. LAWA amended its complaint to add causes of action against JRI, including a claim for violation of the CFCA, and LAWA asserted that when JRI submitted its invoices for progress payments and final payments on the trucks, JRI knew that it was not in compliance with contract and sought to defraud the government entity into making payments.

LAWA’s CFCA claim was based on two theories: (1) JRI fraudulently induced LAWA to enter into the contract, thereby making all subsequent claims for payments violation of the CFCA; and (2) JRI impliedly and falsely certified compliance with applicable contract requirements when it requested progress and final payments. LAWA survived multiple pre-verdict motions including a motion to dismiss (demurrer) and summary judgment on the CFCA claims. LAWA ultimately prevailed only on its cross claims for breach of contract and enforcement of performance bond and the jury only awarded LAWA $1 on those claims, thus reflecting the conclusion that JRI did not have to give back to LAWA any of the progress payments or final payments LAWA made. JRI was unsuccessful on all its claims against LAWA. After entry of judgment, JRI sought attorney’s fees under the relevant defendant’s attorney’s fees provision of CFCA on the ground that LAWA’s CFCA claim was frivolous and harassing. The trial court granted the motion but reduced the amount of the fees.

Under the CFCA, the court may award the defendant its reasonable attorney’s fees and expenses against the public entity that proceeded with the action if the defendant prevails in the action and the court finds that the claim was clearly frivolous, vexatious or brought primarily for the purpose of harassment. The CFCA incentivizes plaintiffs to pursue potentially meritorious claims for fraud on government entities but penalizes clearly frivolous claims.

The Court ruled that the CFCA claim had been “a junk claim all along”. The trial court noted the evidence was overwhelming and uncontradicted that LAWA knew that truck #3 was not built exactly as the contract terms required. However, LAWA desperately insisted it needed the truck to avoid a federal shutdown and LAWA was willing to take the nonconforming truck—which LAWA inspected before delivery and prior to full payment. LAWA then used truck #3 at its airports for years—without bringing any claim against JRI. As for truck #4, it was the subject of a predelivery inspection by LAWA prior to progress payments and final payment and was used at the airports too. In the end, the LAWA firefighters did not like the new model of the trucks and wanted to have their configuration changed before any acceptance of trucks #1 and #2.

The Court stated that the fortuity of whether frivolous, vexatious or harassing CFCA claims have been joined with non-CFCA claims, whether meritorious or non-meritorious, in a single civil action has no logical relevance to determining the prevailing party under the CFCA. Therefore, it should have no effect on a defendant’s statutory entitlement to fees. It made no sense to the Court that statutory fees would not be awarded based upon the outcome of other non-CFCA claims.

The Court also looked at what constitutes a “frivolous” claim for purposes of the CFCA. In short, a frivolous claim is “meritless”, which means one that is groundless or without foundation, rather than simply that the plaintiff has ultimately lost its case. The Court endorsed the notion that it was important that a trial court resist the temptation to engage in post hoc reasoning by concluding that, because a plaintiff did not ultimately prevail, its actions must have been unreasonable or without foundation. The Court warned against this kind of hindsight logic noting that it could discourage all but the most airtight claims, since prospective plaintiff can seldom be sure of ultimate success. The takeaway here: there must be substantial evidence to support a False Claim introduced at trial. Here, that was the acceptance of the trucks at delivery and regarding the two trucks that were not delivered, the inspection of the trucks and approval of progress payments. It was not enough to argue that the False Claims action survived pre-verdict motions to show that a claim was not frivolous, vexing or harassing.

The holding in this case should give a public entity pause in pursuing False Claims actions. While a public entity may be in a strong position to assert contract claims, “upping the ante” to pressure or extract leverage against the contractor, should not be taken without serious consideration that such aggressive tactics, without support of substantial evidence, could result in a costly backfire. At the end of the day, while the public entity won the battle, it lost the war of the fees.

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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