“Catastrophic” Construction?: The Government’s Continued Payment Defeats Materiality

This January, the Eastern District of Pennsylvania rejected a subcontractor’s doomsday allegations that a general contractor had submitted false claims for defective construction work on a project to build a new school on the Marine Corps Base in Quantico, Virginia. In Chowns Group LLC v. John C. Grimberg Co., the court held that notwithstanding the subcontractor’s assertions that the defects were so severe as to create a “catastrophic safety hazard,” the alleged non-compliance was not material to the government’s decision to pay. The subcontractor, a company called Chowns, also brought a novel retaliation claim under Section 13730(h)(1) of the False Claims Act (FCA), claiming that the general contractor, Grimberg, terminated Chowns in retaliation for Chowns’ complaint about the construction defects to the government. Both claims failed and were dismissed at the pleadings stage.

The court found Chowns had adequately alleged falsity under an implied false certification theory, as well as knowledge. As to falsity, Grimberg submitted claims for payment certifying the work both complied with contract specifications and had been performed in a good and workmanlike manner when it allegedly was not. As to knowledge, allegations regarding meetings between Grimberg and Chowns when Chowns raised concerns about the defaults, Chowns informing the onsite government representative of the defects in the project, and Grimberg directing Chowns to remediate the various defects were deemed sufficient.

However, Chowns failed to adequately allege materiality. The court emphasized that “[w]here a contractor fails to disclose noncompliance with a condition of payment, it does not commit a material violation if the government routinely pays such claims.” The court further rejected Chowns’ arguments that the “catastrophic” nature of the construction defect showed its materiality, holding that “[t]he materiality inquiry turns not on the magnitude of the defect, but on the effect the misstatement or omission had on the government’s decision to pay.” Indeed, “[t]hat the defect was material to the value of the product or service provided does not necessarily make the misrepresentation that the work conformed to the contract specifications material.” Ultimately, the government continued to make payments after it was aware of the defects, which proved fatal for Chowns’ claim.

The court also dismissed the retaliation claim because Chowns lacked standing. The court agreed with the Central District of California’s interpretation of the FCA’s retaliation provision, finding that both the congressional history and the plain language of the statute showed Congress intended retaliation under the FCA to only be actionable by individuals, not corporate entities. Further, even if Chowns had standing, the court held that it failed to state a retaliation claim because a claim for retaliation must allege that the plaintiff engaged in protected conduct – such as complaining about fraudulent conduct or false claims – but Chowns only complained about construction defects and poor workmanship.

We at Qui Notes will continue to report on FCA cases of note, particularly where courts, as here, appropriately require FCA plaintiffs to adequately plead each element of an FCA claim. Since the plaintiff had not done so here, the court appropriately rejected the attempt “to transform a construction contract dispute into a False Claims Act action,” and rightly determined that the claims should not proceed past the pleadings stage.

© Arnold & Porter Kaye Scholer LLP 2024 All Rights Reserved. This blog post is intended to be a general summary of the law and does not constitute legal advice. You should consult with counsel to determine applicable legal requirements in a specific fact situation.