On August 22, 2016, the US Court of Appeals for the Fourth Circuit issued a decision in Carlson v. DynCorp International LLC, affirming the district court’s dismissal of an ex-employee’s retaliation suit under the False Claims Act’s (FCA) anti-retaliation provision, 31 U.S.C. § 3730(h). While the Fourth Circuit concluded that the district court applied a standard “rendered erroneous by recent amendments to the statute,” the court nonetheless affirmed the district court’s decision dismissing the case.

Scott Carlson (Carlson) was employed by private military contractor DynCorp International LLC (DynCorp). Because DynCorp had substantial government contracts, it was subject to certain accounting and billing standards dictated by the Office of Federal Procurement Policy. Carlson alleged that DynCorp engaged in improper billing practices on existing government contracts, including one with the US Agency for International Development (USAID), by hiding indirect and overhead costs in an unbillable code. Carlson further alleged that DynCorp fraudulently obtained a new contract from USAID because DynCorp’s bid on the new contract contained a false certification that DynCorp was complying with the accounting and billing standards of the Office of Federal Procurement Policy. Carlson claims that after raising the issue with management, DynCorp terminated him.  Carlson filed his FCA suit for retaliatory termination in the Eastern District of Virginia.  The district court dismissed Carlson’s case with prejudice for failure to state a claim.

The FCA’s whistleblower provision provides relief to employees whose lawful acts “in furtherance of an action under this section or other efforts to stop 1 or more violations of this subchapter” result in retaliatory conduct by the employer. 31 U.S.C. § 3730(h)(1). Carlson claimed that by “questioning DynCorp’s accounting and billing practices and encouraging his staff to do the same amounted to ‘efforts to stop 1 or more violations’ . . . .”

The Fourth Circuit rejected Carlson’s claim. The court began by interpreting the FCA’s retaliation provision in light of amendments made to the statute in 2009 and 2010. The court explained that “[p]rior to 2009, the FCA’s whistleblower provision defined protected activity as employee conduct ‘in furtherance of an action under this section, including investigation for, initiation of, testimony for or assistance in an action filed or to be filed under this section.’” In interpreting that earlier version, the Fourth Circuit (and other circuits) had adopted a “distinct possibility” standard – in other words, an employee engaged in protected activity when litigation is a “distinct possibility.”

However, since the Fourth Circuit adopted the distinct possibility standard, the FCA’s whistleblower provision was amended, once in 2009 and again in 2010. Nonetheless, the district court applied the distinct possibility standard to Carlson’s claim.

The Fourth Circuit agreed with Carlson that “the amendments had the effect of creating two separate prongs to the whistleblower provision, and that the second prong [concerning ‘other efforts to stop 1 or more violations of this subchapter’] necessarily broadens the provision’s coverage.” The appeals court found that the district court erred when it relied on the pre-2009 distinct possibility standard, stating “[t]hat is no longer the (only) standard for identifying protected activity under this provision.” The court then assumed, without deciding, “that Carlson is correct in arguing that the second prong of § 3730(h) makes ‘efforts to stop 1 or more violations’ protected activity where those efforts are motivated by an objectively reasonable belief that the employee’s employer is violating, or soon will violate, the FCA.”

However, the appeals court held that Carlson nonetheless failed to show that his belief that DynCorp was violating the FCA was objectively reasonable.  With respect to the existing government contracts, the court explained that “[a]s DynCorp has maintained throughout this litigation, all Carlson has accused the company of doing is under billing the government on existing contracts.”  Carlson was unable to point to any FCA provision or case that would make under billing a violation and his complaint did not contain enough factual matter to suggest that “DynCorp made or was about to make a false claim on the government.”  Thus, the court noted that even though proving a violation of the FCA is not an element of a § 3730(h) cause of action, Carlson “has failed to raise even a plausible case that what he observed was part of an FCA violation, and thus his alleged belief that DynCorp was violating the FCA [for allegedly hiding overhead costs] was not reasonable.”

With respect to the new contract that Carlson argued was fraudulently obtained from USAID, the court explained that Carlson “failed to explain with any particularity how or which provisions of [the accounting standards] might have been violated.”  In addition, even if he could show that the accounting standards were violated, the court found that “Carlson still cannot show that he held an objectively reasonable belief that this conduct amounted to a violation of the FCA.” Referencing the recent US Supreme Court case, United Health Services, Inc. v. Escobar, the Fourth Circuit questioned: “Surely we cannot be expected to hold that any failure to follow an accounting regulation or best practice on any government contract makes a company a fraudster ineligible to even bid for further business with the United States government?” The Fourth Court explained that even if DynCorp’s indirect cost accounting practices were not consistent with billing standards, “Carlson has failed to sufficiently allege how the practice could amount to fraud and thereby support an objectively reasonable belief that the company was violating the FCA.”