With promises of new federal funding for infrastructure projects coming from the Obama administration, contractors will likely find themselves bidding on a host of public projects in the upcoming years. These federal dollars could find their way to projects which do not involve the federal government directly, but instead have municipalities, states and utility providers as owners. Before bidding on these projects contractors should familiarize themselves with the federal False Claims Act ("FCA"), even if they are not contracting directly with the federal government. The FCA is implicated when a contractor submits fraudulent claims for payment by the federal government. However, recent court decisions have expanded the reach of the FCA to projects in which contractors have contracted with, and are paid directly by, state or local governments. At least one decision has even allowed a contractor to be held liable under the FCA where a municipality sought federal funding after it paid the contactor and without the contractor's knowledge. This has created an environment in which contractors, and subcontractors, must assume that FCA liability is possible even when they have not contracted with the federal government. This article explores the development of the case law concerning the application of the FCA to situations such as these and will offer recommendations to minimize liability.
The Importance Of The False Claims Act
Originally enacted as a response to allegations of pervasive fraud by contractors providing military supplies to the federal government during the Civil War, the FCA has since been fine-tuned into a powerful anti-fraud statute. The two aspects of the FCA that make it both unique and effective are its provisions that allow for treble damages and for a qui tam relator, or "whistleblower," to initiate an action against a contractor.1These provisions address the two most important factors in deterring any form of illegal activity: detection and punishment. If the probability of either factor is low, the activity will not be effectively deterred. Conversely, if the likelihood of either detection by authorities or significant punishment is high, actors will consciously alter their behavior to avoid running afoul of regulations.
For an illustration of this point, consider the following example. If a driver speeding down a deserted road comes to a red traffic light, he may consider running the light if there is no one in sight. If, however, a police officer is parked right next to the red light, chances are that our driver will come to a stop. Likewise, if instead of a police officer, there is a sign next to the light that says, "Penalty for running red light is 20 years in prison," the thought of prison will probably convince our driver to stop for the light. If both the police officer and the sign are present, we can be assured that our driver will stop on a dime.
Using this analogy, the FCA puts up both a sign detailing severe punishment (in the form of treble damages) and a police officer looking for violators (in the form of whistleblowers). For this reason, the FCA must be taken very seriously by those who contract with the federal government and, as will be explained, those who contract with state and local governments as well.
Development Of The Law On FCA Liability For Presenting False Claims To "Grantees" Of The Federal Government
Before he became the Chief Justice of the Supreme Court, John G. Roberts, Jr. wrote the majority opinion in a decision that forced federal courts across the county to reconsider the parameters of the FCA.The case was United States ex rel. Totten v. Bombardier Corp. , and the issue was whether the federal government should be able to bring FCA actions against contractors that submit claims for payment to entities which are not federal agencies but receive federal funding or grants ("grantees").2In Totten , a whistleblower filed an FCA action against Bombardier Corporation and Envirovac, Inc. for their performance on contracts with Amtrak.
The Court in Totten began its analysis by noting that Amtrak, according to its organic statute, "is not a department, agency or instrumentality of the United States Government."3The plaintiff and government argued that any claim submitted to Amtrak is "effectively" a claim presented to the federal government because they are paid with funds that Amtrak received from the government.4Relying on a strict reading of the statutory language of Section 3729(a)(1) of the FCA, the Court concluded that claims were not presented to "an officer or employee of the United States Government," but instead to Amtrak, which is not part of the Government.5The Court also held that the contractors made records to get claims paid or approved by Amtrak and therefore they did not make a false record or statement "to get a false or fraudulent claim paid or approved by the Government" under Section 3729(a)(2) of the FCA.6
In support of its holding, the Totten Court offered a parade of various horribles that it predicted would occur if it extended FCA liability to claims submitted to "grantees." The first is that it could result in "quadruple liability" for defendants with the federal government and the whistleblower obtaining the treble damages provided by the FCA, while the grantee is still able to bring a separate lawsuit to recover its own damages.7Second, such an approach would give the FCA an "almost boundless" reach.8False claims submitted to institutions that have received even a small amount of federal funds, such as most colleges and universities, would trigger FCA liability.
Despite these warnings, at least two cases have since held that contractors can face FCA liability even though they contracted with state and local governments. In United States ex. rel. Maxfield v. Wasatch Constructors , whistleblowers alleged that defendants submitted false claims in connection with an Interstate 15 reconstruction project near Salt Lake City, Utah.9Defendant Wasatch Constructors ("Wasatch") entered into a lump-sum contract with the Utah Department of Transportation ("UDOT") to design, construct and monitor the quality control of 17 miles of highway.10Throughout the project, UDOT and the Federal Highway Administration ("FHA") conducted testing and oversight and the project received federal funds, but UDOT made payments to the contractors and determined whether final acceptance was achieved.11Disagreeing with the Totten decision, the Court in Maxfield held that so long as the Government is the ultimate source of the funds, either directly or indirectly, Section 3729(a)(2) of the FCA covers situations in which false claims are submitted to federal grantees. The Court reasoned that it was "pure happenstance" that UDOT was the one issuing payment to the contractors instead of the federal government and that to hold otherwise "would leave literally hundreds of millions of federal dollars outside the act."12
In United States ex rel. Sialic Contractors Corp. v. Sequel Contractors, Inc. , Orange County contracted with defendant JHTM & Associates, Inc. ("JHTM") to manage the County's contract with defendant Sequel Contractors Corp. ("Sequel"), including reviewing and forwarding Sequel's payment requests to the County.13The plaintiff alleged that JHTM and Sequel colluded to overstate the amount of work performed by Sequel, causing the County to overpay Sequel.14In denying defendants' motion to dismiss, the Court held that plaintiff's allegations support a cause of action under the FCA because they claim that defendants caused Orange County to present a false claim for payment to the Federal Aviation Administration ("FAA"), which ultimately reimbursed Orange County for 80 percent of the cost of the project.15
Sialic Contractors Corp. should make contractors particularly uneasy because Orange County did not submit a request to the FAA for reimbursement until 14 months after it paid Sequel on its claims, and plaintiff did not even allege that the defendants knew that their claims would be submitted to the federal government.16The Court reasoned that term "knowingly" in Section 3729(b) of the FCA "applies to the truth or falsity of the information in the claim, and not to the federal government's involvement."17Therefore, the fact that defendants did not know, and could not have known, that Orange County would seek reimbursement from the federal government was irrelevant and defendants had exposure to FCA liability.
Based on the Maxfield and Sialic Contractors Corp. decisions, contractors potentially face FCA liability in situations in which they have contracted directly with, and get paid directly by, state or local governments. The contractors even face liability when those state and local governments, unbeknownst to the contractors, obtain federal funding after payments on the contracts have been made. Incidentally, these decisions are not on the fringe of mainstream thinking on this issue. When asked about his majority opinion in the Totten case during the Senate confirmation hearings for his nomination to the Supreme Court, Judge Roberts acknowledged that "it's certainly possible that the majority in that case didn't get it right."18Therefore, contractors can expect more courts to find contractors liable under the FCA for submitting false claims to grantees of federal funds.
Avoiding FCA Liability
Fortunately, contractors can minimize their exposure to FCA liability by merely following generally accepted business practices. As an initial matter, contractors should develop a system for maintaining detailed accounting records which tracks the cost of both base scope work and work due to changes on the project. On large projects, periodic audits can help ensure that records are being properly maintained and payment requests are being properly submitted. In fact, accurate accounting records were cited as a reason for dismissing the federal government's FCA counterclaim against a contractor in Trafalgar House Constr., Inc. v. United States .19The Court noted that the contractor's behavior was "far from a model of best contracting practices" and disagreed with the methodology by which the contractor calculated its damages, but concluded that its claim "was consistent with underlying financial records."20
Second, contractors should require that their employees and subcontractors accurately document their time and progress on the job. Field and progress reports can provide the government with an additional level of detail that support requests for payment. Third, project management should be familiar with all applicable governmental rules and regulations that concern documentation, claims and payment. Management should then provide training on the regulations to lower level employees, emphasizing any nuances in the regulations that will bear on each employee's particular area of responsibility.
Finally, contractors should be aware that federal funds can potentially be used on state, municipal, utility and even university projects. Because the potential for FCA liability is present on a variety of construction projects, contractors should conduct themselves on all projects with the same level of care. Or, to employ the driver on the deserted road analogy, contractors should assume that a sign and an officer are both next to the red light.
1 See 31 U.S.C. § 3729(a) (providing for a penalty of between $5,000 and $10,000 plus three time the amount of damages sustained by the government); 31 U.S.C. § 3730(b) (providing for actions by private persons).
2 380 F.3d 488 (D.C. Cir. 2004).
3 Id. at 491 (quoting 49 U.S.C. § 24301(a)(3)).
4 Id . at 492.
5 Id . at 502.Section 3729(a)(1) of the FCA imposes liability on anyone who "knowingly presents, or causes to be presented, to an officer or employee of the United States Government . . . a false or fraudulent claim for payment or approval."31 U.S.C. § 3729(a)(1).
6 Id .Section 3729(a)(2) of the FCA imposes liability on anyone who "knowingly makes, uses, or causes to be made or used, a false record or statement to get a false or fraudulent claim paid or approved by the Government."31 U.S.C. § 3729(a)(2).
7 Id . at 496.
8 Id.
9 2005 U.S. Dist. LEXIS 10162 (D. Utah May 27, 2005)
10 Id . at *6.
11 Id . at *7.
12 Id . at *25-26.
13 402 F. Supp. 2d 1142 (C.D. Ca. 2005).
14 Id.
15 Id. at 1150.
16 Id . at 1150-51.
17 Id. at 1151.
18 Confirmation Hearing on the Nomination of John G. Roberts, Jr. to be Chief Justice of the United States Before the Senate Comm. on the Judiciary, 109th Cong. 320 (2005) (response to questions from Sen. Grassley).
19 77 Fed. Cl. 48, 2007 U.S. Claims LEXIS 125 (Ct. Cl. 2007).at * 29-33.
20 Id. at *29-33.
Published February 1, 2009.
