FCPA Compliance and Ethics Blog

July 30, 2013

Two Cases from the Fifth Circuit Impacting Claims of Bribery and Corruption

Filed under: Uncategorized — tfoxlaw @ 1:01 am

Over the past two weeks there were two separate Fifth Circuit Court of Appeals cases dealing with allegations of bribery and corruption. In the first case, the Court of Appeals denied the right of a whistleblower under the Dodd-Frank Act, to receive anti-retaliation protection for internally reporting allegations of violations of federal securities laws, such as the Foreign Corrupt Practices Act (FCPA). In the second case, the Fifth Circuit Court of Appeals upheld the right of the US government to seek redress against a corporation, under the theory of vicarious liability, for its employees who accept kickbacks in the context of a government contract.

I.                   Asadi v. G.E. Energy

Last week, the Fifth Circuit Court of Appeals issued its decision in Asadi v. GE Energy (USA), No 12-20522. As noted in a Duane Morris LLP client alert on the decision, it was “hailed as a win for employers because it requires whistleblowers who bring retaliation claims under the Dodd–Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank) to show that they suffered retaliation because they reported potential violations to the U.S. Securities and Exchange Commission (SEC). The Fifth Circuit expressly rejected the position adopted by the SEC in its regulations” that being that internally reporting concerns regarding FCPA violations was enough to invoke Dodd-Frank whistleblower protections.

However I believe that the decision was actually a loss for companies, their employees and anyone who believes that compliance with the FCPA is a laudable goal. Now there is no longer any incentive, nor indeed any protection, for employees who make reports of allegations relating to the FCPA internally. The only way to garner such protection for reporting any FCPA allegations is for an employee to run to the SEC and file a whistleblower report.

Corporate America fought long and hard to require that employees report allegations of corruption and bribery internally before they went to the government. The reason that companies made this request was that it was only fair to allow companies to fix problems of which they may not have been aware. While the SEC did not require internal reporting as a prerequisite for Dodd-Frank whistleblowing, it did incentivize such whistleblowers to report internally first before submitting information to the SEC.

But now that incentive is worthless if an employee who does so can be terminated at will for internally reporting concerns about bribery and corruption. The result will be that employees immediately turn to the SEC so that they can at least have the anti-retaliation protections offered under Dodd-Frank. The Asadi case could have had several outcomes but the one the Fifth Circuit left us with is the worst for FCPA compliance of all the possible outcomes.

Further, what about the costs that corporations will incur because of this decision? The cost on one employee’s retaliation lawsuit pales in comparison with the cost of a substantive FCPA or other securities law investigation. Since employees now are required to go to the SEC to invoke whistleblower status and, hence, anti-retaliation protection, they will certainly get the message. So while corporations may have a substantive defense against someone who internally reports allegations and is subsequently fired, the trade-off for the loss of the ability to address and then redress a securities law violation internally is now gone.


In the case of USA v. Kellogg Brown & Root, No. 12-40447, in a case involving the ‘Anti-Kickback Act’; the Court allowed the US government to intervene in a qui tam suit against Kellogg Brown & Root (KBR) where its employees “allegedly accepted kickbacks from two companies angling to win subcontracts on KBR’s prime contract to service American armed forces in military theaters across the globe.” The underlying facts involve a contract that KBR had with the government for the delivery of logistical services for the US Army under the Logistics Civil Augmentation Program III (LOGCAP III). Two subcontractors, EGL Inc. (EGL) and Panalpina Inc. (Panalpina), who were contracted to assist with the transportation of military equipment and supplies were alleged to have bribed certain KBR employees to “obtain favorable treatment on…subcontracts with KBR such as overlooking service failures and continuing to award new subcontracts despite such failures.” KBR employees were alleged to have accepted kickbacks from EGL on 93 separate occasions. The kickbacks were detailed to be “meals, drinks, golf outings, tickets to rodeo events, baseball games, football games, and other gifts and entertainment.” KBR employees were alleged to have accepted kickbacks from Panalpina on 55 separate occasions. These kickbacks were detailed to be in the forms of “meals, drinks, golf, outings, and other gifts and entertainment.” Both the EGL and Panalpina employees involved pled guilty to charges under the Act. Sometime later two private citizens brought a qui tam suit against KBR and the government intervened.

What is the ‘Anti-Kickback Act’?

The Act prohibits kickbacks, which is “a kind of economic crime”, for subcontracts under US government prime contracts. It was originally enacted during World War II and was most recently updated in 1986. Prior to these amendments, “the government could recover only the value of a kickback and could obtain relief only from the kickback’s recipient or the subcontractor who provided it. The 1986 amendments reshaped the civil damages remedies by permitting, in § 55(a)(1), recovery of double damages and per-occurrence penalties from knowing violators of the Act.” (citations omitted)

The definition of what is a ‘kickback’ is quite broad; broader than the definition of what is prohibited under the FCPA. The Act defines a kickback as “any money, fee, commission, credit, gift, gratuity, thing of value, or compensation of any kind that is provided to a prime contractor, prime contractor employee, subcontractor, or subcontractor employee to improperly obtain or reward favorable treatment in connection with a prime contract or a subcontract relating to a prime contract.” Under the Act “A person may not—(1) provide, attempt to provide, or offer to provide a kickback; (2) solicit, accept, or attempt to accept a kickback; or (3) include the amount of a kickback prohibited by paragraph (1) or (2) in the contract price—(A) a subcontractor charges a prime contractor or a higher tier subcontractor; or (B) a prime contractor charges the Federal Government.”

Court Holding

For the purposes of the appeal it is noted that “the benefits provided to Bennett and other KBR employees were kickbacks given to prime contractor employees by subcontractor employees.” The question for the Court of Appeals was whether the US government can ever bring a suit under the Act, alleging that a company can be vicariously liable for the acts of its employees. The Court noted that the Act allowed the government to “recover from a person” and that Congress had “defined ‘person’ broadly in the AKA [the Act], to include corporations and other business entities.” Further, “Since Section 55(a)(1) makes corporations liable for kickback activity, it requires attributing liability to corporate entities for that activity under a rule of vicarious liability.”

This KBR case is one that corporations should also pay heed to quite closely. The US government need only show that illegal payments, in the form of kickbacks, are received by a US government contractor’s employee for the company to be liable under the Anti-Kickback Statute. The representatives of EGL and Panalpina, who engaged in the bribery and corruption, have already pled guilty under the criminal provisions of the Act so it would appear that the government only needs to show that the KBR employees received the kickbacks. Further, considering the list of what constitutes a kickback is quite broad, including “any money, fee, commission, credit, gift, gratuity, thing of value, or compensation of any kind”, it may not be too hard for the government to prevail at trial.

However you look at it, corporate America did not fair too well in the Fifth Circuit in these two cases.

This publication contains general information only and is based on the experiences and research of the author. The author is not, by means of this publication, rendering business, legal advice, or other professional advice or services. This publication is not a substitute for such legal advice or services, nor should it be used as a basis for any decision or action that may affect your business. Before making any decision or taking any action that may affect your business, you should consult a qualified legal advisor. The author, his affiliates, and related entities shall not be responsible for any loss sustained by any person or entity that relies on this publication. The Author gives his permission to link, post, distribute, or reference this article for any lawful purpose, provided attribution is made to the author. The author can be reached at tfox@tfoxlaw.com.

© Thomas R. Fox, 2013

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