False Claims Liability: The Long Arm of the Law

A Laurie & Brennan article featured in the Construction Law Corner Winter 2013 eNewsletter.

by Daniel Brennan

The False Claims Act, 31 U.S.C.  § § 3729-33, (“FCA”) had its genesis in the rampant procurement fraud that the U.S. government experienced in the Civil War.   To battle war time profiteers, Congress first passed the FCA in 1863.   As the size and breadth of federal government programs grew through the New Deal and the Great Society so too did the reach of the FCA.   In recent weeks, the popular press has reported on yet another example of just how far the FCA can reach.   In the aftermath of the ignominious demise of Lance Armstrong due to his use of banned substances during his cycling career, Floyd Landis — a former Armstrong teammate, an admitted user of performance enhancing drugs and critic of Armstrong — filed a whistleblower suit under the FCA seeking damages based on false statements that Armstrong and other cycling teammates made in connection with the U.S. Postal Service’s funding of Armstrong’s racing. Landis alleges that Armstrong and his teammates made false statements or implied false statements about the use of prohibited performance enhancing drugs.

If the FCA can ensnare a professional cyclist that received sponsorship funds from the U.S. government, it is no stretch to realize that construction contractors doing business on government projects (or on projects that receive federal funding) can also be caught in the cross-hairs if any missteps are made.   Contractors should be aware of the key provisions of the FCA, what it prohibits and the potential scope of its application.   This article will highlight some of those issues, discuss some recent cases that have interpreted the FCA and summarize some of the key provisions of Illinois’ own false claims statute.

What Does the FCA Prohibit?

In the simplest terms, the FCA prohibits a person (which includes any business entity) from knowingly making a false claim for money or property from the U.S government.   That seems straightforward but the contours of a false claim are more subtle and in some ways more far reaching than that simple statement.   To grasp these subtleties, one must understand at the least the following (a) how is claim defined; and (b) what constitutes knowledge.

The FCA defines a claim as follows:

[A]ny request or demand, whether under a contract or otherwise, for money or property and whether or not the United States has title to the money or property, that–

(i) is presented to an officer, employee, or agent of the United
States; or

(ii) is made to a contractor, grantee, or other recipient, if the money or property is to be spent or used on the Government’s behalf or to advance a Government program or interest, and if the United
States Government–

(I) provides or has provided any portion of the money or property requested or demanded; or

(II) will reimburse such contractor, grantee, or other recipient for any portion of the money or property which is requested or demanded…

31 U.S.C.  § 3729(b)(2)(A).   Under this definition, a claim that is presented either directly to the U.S. government or to some entity that is receiving U.S. government funding to pay the claim can trigger FCA liability.   It is this latter category that stretches the reach of the FCA to construction projects that are not commonly considered “federal projects.”

False claims liability under the FCA can arise due to (a) direct false claims, (b) false statements/records, and (c) reverse false claims.   These three categories of prohibited conduct are specifically set forth in the FCA.   Direct false claims are the most straightforward.   Such a claim occurs when a person “knowingly presents or causes to be presented, a false or fraudulent claim for payment or approval.” 31 U.S.C.  § 3729(a)(1)(A).   A person may also be exposed to liability if that person “knowingly makes, uses, or causes to be made or used, a false record or statement material to a false or fraudulent claim…” is liable under the FCA.   31 U.S.C.  § 3729(a)(1)(B). (emphasis added).   Finally, if a person does not return property or money that belongs to the U.S. government, that person can be liable under the FCA.   31 U.S.C.  § 3729(a)(1)(G).

There is extensive case law interpreting the FCA.   Several cases illustrate the potential scenarios that could create pitfalls for construction contractors doing business with the U.S. government or on projects that are funded by the U.S. government.   Projects or contracts that are even partially funded by the U.S. government can result in FCA exposure.   In United States ex rel. DRC, Inc. v. Custer Battles, 562 F.3d 295 (4th Cir. 2009), the contractor overbilled for the actual costs of trucks and generators to the tune of almost $400,000.   The bills were submitted to the Iraq Coalition Authority which itself was funded by the Development Fund for Iraq.   That fund received financing from multiple sources only one of which was the U.S. government.   Despite the fact that the U.S only partially funded the payments, the Fourth Circuit held that the FCA applied and that the full amount of the claims were considered false claims.

Overbilling is the most obvious tripwire for FCA liability.   A less obvious risk is when contractors allocate costs in billings and that allocation is arguably contrary to contract requirements.   In U.S. ex rel Hudalla v. Walsh Construction Co., 834 F. Supp.2d 816 (N.D. Ill. 2011), the general contractor worked on several HUD projects to renovate various housing projects.   The general contractor submitted budgets to HUD that broke down the costs including costs that would be billed as “general conditions costs” (amounts that would go into the general contractor’s pocket) and “trade costs” (amounts payable to the subcontractors).   There was a six percent cap on the general conditions costs.   These budgets were approved by HUD and served as the basis for processing payments to the general contractor.   After the projects were completed, a former employee of the general contractor filed a whistleblower action under the FCA claiming that the general contractor wrongfully billed costs as trade costs that should have been billed as general conditions costs (and subject to the cap).   The general contractor filed a motion for summary judgment.   The court denied the motion finding that there was enough evidence to go to trial under the FCA.   The case eventually settled.

So overbilling is bad.   Shuffling money around is also frowned upon.   The FCA goes even further.   Recall that false statements that are “material” to a claim for money or property can also form the basis for an FCA claim.   In United States v. DRC, Inc., 2012 WL 1379833 (D.D.C. April 21, 2012), a contractor was hired by a Honduran relief fund to rebuild after a hurricane.   The contract was funded by the U.S. Agency for International Development (“USAID”).   The contract did not allow the general contractor to subcontract any work without the consent of both the relief fund and USAID.   The general contractor admittedly hired subcontractors without the required consents and billed for the work of such subcontractors.   The U.S. brought suit under the FCA claiming that the general contractor, by submitting bills that included the unapproved subcontractors’ work, impliedly certified that the subcontractors were approved — because the contractor did not otherwise disclose the truth that these subcontractors were not approved.   The general contractor attempted to extricate itself by filing a motion for summary judgment.   The court denied the motion finding that the “materiality” of the subcontractor approval and its nexus to the payment process was a question of fact.

What Are the Penalties for Violation of the FCA?

FCA violations may subject violators to treble damages and penalties of $5,500 to $11,000 per claim, companies face the risk of suspension and debarment, and in some cases, criminal prosecution.   Moreover, in addition to being a statute to prevent fraudulent claims against the government, the FCA is now a significant revenue generator due to current stress on the federal treasury from declining tax revenues caused by the last several years of economic malaise, government bailouts, and quantitative easing to support the financial system.   The volume of claims being brought in just the past 4 years has increased by over 50 %. In 2011 alone, more than 760 new FCA matters were initiated; and the recovery numbers are on pace to be the largest ever in 2012. ¹   The take away from these statistics is that the U.S. government is ever more vigilant against false claims for a variety of reasons.   It behooves contractors doing business with the U.S. government, or with any entity who receives funding or reimbursement for project costs, to be equally vigilant in scrutinizing the veracity of claims.

The Illinois False Claims Act

The combination of the breadth of the FCA and the pervasive federal funding throughout all levels of construction activity in the U.S. could cause contractors to overlook other sources of false claims liability.   That would be unwise.   Illinois has its own false claims statute.   Even if an Illinois state government project (or state funded project) does not receive federal financial assistance (or does not receive federal reimbursement), the Illinois False Claims Act (“IFCA”), 740 ILCS 175/1 et seq., will come into play to impose false claim liability.

Liability under the IFCA can arise under a variety of circumstances.   For example, any person that (a) knowingly presents, or causes to be presented, a false or fraudulent claim for payment or approval; (b) knowingly makes, uses, or causes to be made or used, a false record or statement material to a false or fraudulent claim; or (c) knowingly makes, uses, or causes to be made or used, a false record or statement material to an obligation to pay or transmit money or property to the State, is liable to the State for damages and civil penalties.   740 ILCS 175/3(a)(1).   The “State” is defined as “the State of Illinois; any agency of State government; the system of State colleges and universities, any school district, community college district, county, municipality, municipal corporation, unit of local government, and any combination of the above under an intergovernmental agreement that includes provisions for a governing body of the agency created by the agreement.”   740 ILCS 175/2(a).

The consequences for a violation of the IFCA can include a civil penalty of not less than $5,500 and not more than $11,000, plus 3 times the amount of damages which the State sustains because of the act of that person. Criminal prosecution may also be brought for the same conduct.   Finally, a person violating this IFCA will also be liable to the State for the costs of a civil action brought to recover any such penalty or damages.   740 ILCS 175/3(a)(1).

Like the FCA, the IFCA premises liability on a person “knowingly” making a false claim.   What is a “knowing” false claim under the IFCA is similarly expansive as under the FCA.   A person acts knowingly if that person (a) has actual knowledge; (b) acts in deliberate ignorance of the truth or falsity of information; or (c) acts in reckless disregard of the truth or falsity of information.   Specific intent to defraud is not required.   Contractors must not only avoid outright lies but also must make reasonable inquiry into the truth of information submitted for payment.   This would include subcontractor invoices or subcontractor claims.

Conclusion

Contractors need to heighten their awareness of billing practices and contract requirements when dealing with federally-funded or state-funded projects.   What might seem a minor nuisance, or at best a garden variety breach of contract claim, could morph into major financial — and possibly criminal — liability under the FCA or the IFCA.   While it may seem trite, honesty is the best policy.   Less trite and more troubling is that honesty appears to be in the eye of the beholder – the U.S. government. As enforcement of the FCA has escalated, either to rein in fraud or fill depleted government coffers, contractors need to recognize that the government is pushing the envelope of the FCA.