Violation of California's False Claims Act Properly Considered in Contractual Arbitration and Award of Attorney Fees Pursuant to Public Contract Code Affirmed

County of Solano v. Lionsgate Corporation, A103269, (Cal.App.4th 2005).

In County of Solano v. Lionsgate Corporation, the dispute concerned general contractor Lionsgate's performance of a contract to replace a bridge for the County of Solano County. The contract incorporated the Caltrans Standard Specifications, including an arbitration clause that generally required all disputes to be subject to binding contractual arbitration pursuant to California Public Contract Code §§ 10240-10240.13.

The County filed a complaint in arbitration, charging Lionsgate with breach of the covenant of good faith and fair dealing, fraud, and numerous False Claims Act violations. The complaint sought a total of $531,783.46 in damages and penalties. Lionsgate objected to the arbitration, contending that the contract did not authorize arbitration of False Claims Act causes of action. The arbitrator overruled the objection, relying on Crown Homes, Inc. v. Landes for the proposition that statutory claims may be arbitrated.

After a lengthy hearing on the merits, the arbitrator found that Lionsgate's false claims under the bridge contract had caused the County to incur substantial investigative and administrative costs, but concluded that those expenses were not recoverable as damages. Nevertheless, the arbitrator awarded the County $210,000 in civil penalties under the False Claims Act. Lionsgate appealed.

The Court of Appeal upheld the determination that the contract's arbitration clause included False Claims Act issues. Lionsgate primarily had argued that the False Claims Act makes references to "a civil action" to recover penalties and to assessments and findings by "the court", which could not mean "arbitration". The Court of Appeal dismissed this argument, noting that California courts have long held that similar contractual arbitration references may include statutory claims under the Unfair Business Practices Act, the Consumer Legal Remedies Act and the Cartwright Act.

Lionsgate also argued: that it never agreed to arbitrate the penalty aspects of False Claims Act contentions; that the arbitrator's powers were limited to assessing "damages and compensation" but not penalties; and that the arbitration clause was a contract of adhesion and ambiguous, since it did not specifically state that False Claims Act issues were subject to arbitration.

The Court of Appeal rejected each argument. First, the court noted that, if Lionsgate believed that the arbitration should not include False Claims Act issues, then it could have sought to sever those issues from the arbitration. It did not. Second, the court held that the imposition of penalties as a form of compensation was well within the arbitrator's authority, especially since the agreement had a broad compensation provision that did not contain anything to the contrary. Third, the Court did not find anything unconscionable with respect to the agreement to arbitrate nor was it ambiguous with respect to the arbitration of the False Claims Act issues.

Almost more compelling was the arbitrator's award of the County's attorney's fees pursuant to Public Contract Code §10240.13(a). This Section of the Public Contract Code provides that reasonable attorney fees may be recovered where a party to the arbitration makes a reasonable offer to settle, that offer is not accepted, and the offering party obtains a more favorable award. The attorney fee award is limited to those fees incurred from and after the time of the offer. Here, the court's opinion does not describe the County's offer that Lionsgate did not accept in November 1997. The arbitrator rendered his award in November 2001, and it evidently exceeded the County's 1997 offer, because the County then submitted a petition for attorney fees in the amount of $690,000 pursuant to Public Contract Code §10240.13(a). The arbitrator eventually awarded the County $500,000 in attorney fees. The Court of Appeal rejected Lionsgate's appeal of the award of the attorney fees with little discussion, since the statute clearly authorized the attorney fees under the circumstances.

Obviously, Lionsgate rolled the dice and lost, very badly. In 1997, the County offered to settle with Lionsgate on terms more favorable than the $210,000 that the arbitrator ultimately awarded to the County in 2001. Now in 2005, Lionsgate will be liable to the County for the $210,000 in the False Claims Act penalties, $500,000 for the County's attorney fees, and some $32,000 in recoverable cost for a total of $742,000, excluding interest. To add insult to injury, Lionsgate no doubt incurred its own attorney's fees and costs. If one conservatively assumed that Lionsgate incurred approximately one half of that amount of the County's attorney's fees, approximately $250,000, and its own costs in the amount of $32,000, Lionsgate's litigation expenses alone were close to $300,000. At the end of the day and after seven years of litigation, Lionsgate will pay out more than $1 million, when in 1997 it could have resolved the matter for something less than $210,000.

- James E. Sell