False Claims Act May Bite Harder in ’09

Compliance with the False Claims Act, always a headache for government contractors, could swell into a permanent migraine in 2009.

Legislation is winding through Congress to amend the FCA, which is the government’s primary tool to combat fraud in procurement. Observers say the changes would drastically expand the statute, sweep many more companies under its purview, and give whistleblowers an easier process to file lawsuits on the government’s behalf.

Hutt

“If the proposed amendments move forward in anything like their current shape, it would be unequivocally bad news for Corporate America,” says Peter Hutt, a partner in the law firm Akin Gump Strauss Hauer & Feld.

The FCA was originally passed in 1863 to protect the federal government from fraud in Civil War defense contracts, but was rarely used until amendments in 1986 allowed private citizens to file “qui tam” motions on behalf of the government, Hutt says. More than 5,800 qui tam FCA cases have been filed since then; the government has recovered more than $21 billion, $12.6 billion of which has been the result of qui tam whistleblower actions.

The new legislation, filed in both the House and Senate as the False Claims Correction Act, would make such lawsuits much easier for plaintiffs to file and much harder for corporations to defend. How the bill will fare in Congress is still anyone’s guess, but observers say the financial crisis improves the odds that the legislation will gain traction, since lawmakers are keen to strengthen antifraud regulation. It’s expected that Iowa Republican Charles Grassley, a sponsor of the Senate bill and a champion of the FCA, will again lead the charge to amend the act.

“If the proposed amendments move forward in anything like their current shape, it would be unequivocally bad news for Corporate America.”

— Peter Hutt,

Partner,

Akin Gump Strauss Hauer & Feld

McDermott

Kathleen McDermott, a former federal prosecutor and now a partner in the law firm Sonnenschein Nath & Rosenthal, says the proposed legislation would “turn the FCA into a general ‘bad acts’ statute with huge consequences, not just for large companies that participate in federal programs, but for any organization that receives any federal money in any fashion.”

Hutt and others say the amendments could also cause years of uncertainty about the statute’s application by effectively overturning several key legal decisions, such as Rockwell Int’l v. United States, Totten v. Bombardier Corp., Allison Engine Co. v. United States, and United States ex rel. DRC Inc. v. Custer Battles.

For all of those reasons, the legislation bears watching by anyone doing business with or receiving money from the federal government, says Eric Leonard, a partner with Wiley & Rein.

How the Floodgates Open

As proposed, the bills would virtually eliminate the key defense used to bar whistleblowers from filing so-called parasitic lawsuits, where plaintiffs file civil actions based on information from criminal indictments or other public sources of information. Under the proposed amendments, only the Justice Department would be allowed to use that “public disclosure bar” as a defense. Since the department has neither the resources nor the incentive to do so, Hutt says, the change would lead to a parade of whistleblower suits based on public information.

LINCOLN’S LAW

In the following letter, Senator Chuck Grassley urges the Federal Government to utilize “Lincoln’s Law” to recover taxpayer dollars lost to fraud.

Dear Secretary Paulson and Attorney General Mukasey:

The Emergency Economic Stabilization Act of 2008 (the “Act”) signed into law October 3, 2008, authorized the President to grant Treasury the authority to purchase, or commit to purchase, troubled assets up to the limit of $700 billion. Through the Troubled Asset Recovery Program (TARP) and the Capital Purchase Program (CPP), Treasury is using the broad authorities of the Act to stabilize the economy. While Congress gave the Treasury the authority to use taxpayer funds, Congress also outlined strict oversight provisions to ensure that taxpayer dollars would be used efficiently, effectively, and would not be subject to waste, fraud, or abuse.

Nearly seven weeks since the passage of the Act, effective oversight of the TARP and CPP is still lacking. To date, many of the oversight provisions have been overlooked or ignored—in fact, the first nomination hearing for the role of the Special Inspector General for the TARP was just held this afternoon. At least one other hearing will follow. According to The Washington Post, some even fear that, “bureaucratic logjams” could delay oversight work for months. American taxpayers deserve better than bureaucratic logjams and I look forward to the expedited review of Mr. Neil Barofsky’s nomination for the position of Special Inspector General.

In the meantime, taxpayer dollars are at risk and I believe it is important to discuss alternative procedures and measures that can be taken to ensure taxpayers aren’t taken to the cleaners by unscrupulous individuals. One proven and effective method of overseeing taxpayer funds has been to support courageous whistleblowers who risk their jobs and livelihoods to bring forth allegations of fraud, waste, and abuse of taxpayer monies. As a longtime supporter of whistleblowers, I can attest to the fact that whistleblowers are often the key to uncovering schemes to defraud the government. With their inside knowledge of how businesses, corporations, or government agencies operate they are often privy to information that is often the necessary component to piece together how a fraud is perpetrated. As such, I believe you should both work to ensure that all entities participating in the TARP and CPP are made aware that any allegations of fraud, waste, or abuse will be treated seriously and properly referred to the Treasury Inspector General or the Attorney General for review until a Special Inspector General for the TARP is appointed.

Additionally, another effective deterrent to fraud against the Government has been the False Claims Act (FCA) (31 U.S.C. § 3729 et. seq.). As the Senate author of the 1986 amendments that reinvigorated the qui tam whistleblower provisions of the FCA, I believe the FCA can and will play an important role in preventing, deterring, and prosecuting fraud against the TARP and CPP. For example, it has been long recognized by Federal Courts across the country that actionable fraud against the government has occurred when:

An entity seeks payment pursuant to a program they are not eligible for,

Fraudulently seeking to obtain a Government contract,

Submitting fraudulent applications for a grant of Government funds,

Submitting a false application for a Government loan, and

Submitting a claim that falsely certifies that the defendant has complied with a law, contract term, or regulation.

While these examples are by no means an exhaustive list of FCA liability, these examples do show that entities who receive federal funds under the TARP and CPP are subject to the provisions of the FCA should they use false or fraudulent submissions in order to obtain federal funds. For instance, any entity that submits false or fraudulent information in an application to Treasury in order to obtain federal funds available through the CPP would be liable to the Government under the FCA. Further, while it has been reported that the Treasury does not currently plan to utilize authority under the Act to use the TARP to purchase distressed assets either directly or indirectly, should Treasury exercise its authority to do so, any fraudulent statements or submissions made to induce the Government to purchase those assets would also subject the fraudfeasors to liability. As a result, these individuals and corporations could be subject to civil penalties and treble damages for committing fraud against the Government.

It is my sincere hope that in this time of economic difficulty that businesses, corporations, banks and other institutions applying for federal assistance under the TARP and CPP would make only accurate and truthful statements to the Government. However, many individuals use complex situations to take advantage of the Government and will stop at nothing to obtain government funds, including providing false and misleading information to do so. To this point, a witness from the Justice Department testified before the Senate Judiciary Committee earlier this year that “[T]here are no government programs that are immune from possible fraud.” As such, I encourage both of you to ensure that whistleblowers are treated seriously, their concerns are reviewed in an expeditious manner, and that any legitimate claims of fraud, waste, or abuse are aggressively investigated and prosecuted to the fullest extent of the law, including seeking recovery of all funds lost via the FCA.

—Charles E. Grassley

United States Senator

Source

Senator Chuck Grassley’s Website (Nov. 17, 2008).

The House version would also eliminate a requirement under Rule 9(b) of the Federal Rules of Civil Procedure that requires qui tam plaintiffs to allege the details of an alleged fraud with particularity. That will make it even easier for plaintiffs to bring cases, Hutt says.

Madsen

The Senate version would expand the pool of potential plaintiffs by allowing government employees to sue as qui tam plaintiffs under certain circumstances. The public disclosure bar currently makes that extremely difficult for a government employee to do, according to Marcia Madsen of the law firm Mayer Brown—but the amendments will repeal the public disclosure bar as a defense.

Both bills would also extend the current six-year statute of limitations to 10 years for all pending cases. That change alone could be profound, Leonard says, because it will leave government contractors exposed to litigation risks for a much longer period of time.

Then there’s the cost of FCA litigation and penalties. While the False Claims Act currently provides for civil penalties of up to $11,000 per claim and treble damages calculated based on the amount of the government’s loss, Madsen says the Senate bill would provide for damages based on three times the value of the contract at issue—a potentially staggering cost, if a company experiences a relatively small fraud on a large contract.

If the proposed amendments become law, Madsen says companies might be even more likely to settle than fight. “The amendments would make it easier … to bring FCA cases and to keep them in play longer, the threat of increased damages would make it riskier to litigate,” she says.

More Complications

Further complicating matters is a new mandatory disclosure rule for government contractors that took effect in December, which requires government contractors and sub-contractors to report any violations of the False Claims Act where they have “credible evidence.” If the amendments pass, Leonard says the potential for qui tam plaintiffs to piggyback on those mandatory disclosures could have a “domino effect” in the number of cases filed.

Madsen agrees. Because of the mandatory disclosure rule—enshrined in Federal Acquisition Rule 3.10—if the amendments pass, the potential for more troublesome lawsuits “goes way, way up,” she says.

Leonard

Even apart from the legislation, Leonard says there’s been a trend recently toward more aggressive enforcement in the False Claims Act area. “The cases we’re seeing aren’t the garden variety cases of over-billing the government; they’re covering a much broader scope of activity,” he says.

As a result of a broad and aggressive interpretation of the law, he says, “Even seemingly harmless mistakes can land a company in the middle of a False Claims Act case that can cost hundreds of thousands of dollars to prove [its] way out of.”

Regardless of whether the legislation re-emerges, Leonard expects a “renewed focus” with the Obama Administration on fraud and perceived fraud within the government contracting and healthcare communities.