Government Contracts Blog : Government Contracts Lawyer & Attorney : Sheppard Mullin Law Firm : Bids, Licenses, Awards, Conflict of Interest.

With its recent decision in Cell Therapeutics Inc. v. Lash Group Inc., 9th Cir., No. 08-35619, Nov. 18, 2009, the United States Court of Appeals for the Ninth Circuit took a dramatic step towards preserving the rights of False Claims Act (FCA) defendants. The court's ruling permits FCA qui tam defendants to seek recovery against third parties vis-à-vis contractual indemnity and independent claims after settling an FCA action with the government and an employee whistleblower (known as a "relator").
 

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Stimulus projects are likely to come with a thick string of transparency and accountability requirements, along with potentially severe financial penalties and, in some cases, possible prison time. These conditions may be extended not only to U.S. government contractors, but to companies undertaking federally funded projects for state and local governments.

Companies that plan to accept money from the 2009 American Recovery and Reinvestment Act (ARRA) should consider acting now to prepare for an especially demanding environment. Investing time, effort, and resources today to establish and improve risk management and compliance processes and controls can help companies mitigate potentially catastrophic problems later.

Learn more by reading the complete paper authored by Deloitte Financial Advisory Services partner, Donna Epps, and Sheppard Mullin Government Contracts partner, John Chierichella, available through the following link.

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The civil False Claims Act (FCA) prohibits using false statements related to a false claim. (Other types of FCA liability include presenting a false claim, concealing an obligation to pay money to the government, and conspiring to violate the FCA.) In the recent FCA amendments, Congress explicitly added materiality as an element of FCA false statement liability.  Not surprisingly, it also adopted a weak, pro-plaintiff definition: materiality means “having a natural tendency to influence, or be capable of influencing, the payment or receipt of money or property.”
 

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Congress recently expanded contractors’ liability under the civil False Claims Act (FCA). The substantive changes include eliminating the presentment requirement, adding liability for claims seeking non-United States funds, expanding the scope of reverse false claims and conspiracy liability, and eliminating the intent requirement for conspiring to violate the FCA and for using false statements material to a false claim.
 

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I.  INTRODUCTION

Without a doubt, the False Claims Act ("FCA") has been dramatically changed in the last few months. As will be discussed in more detail herein, it certainly appears that the FCA has been retooled so that the playing field is now stacked in favor of the government and qui tam plaintiffs. There is also every indication that lenders who have federally insured mortgages, redevelopment funding, or other financial support from the government, are at risk of being sued for false claims unless they take certain precautions to educate and protect themselves.

In fact, it is a good idea for all companies who receive government funding (e.g., defense contractors, health care providers, academic institutions) to look closely at their internal compliance programs, and modify them to reflect the recent changes in the FCA. This article is intended to offer some specific suggestions, and also encourage companies to have their programs amended, and implemented by legal counsel who are receptive to flexible billing arrangements including flat fee schedules.
 

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In November 2002, the FAR Councils eliminated the so-called "paid cost" rule from the FAR, which had previously prevented federal prime contractors other than small businesses from recognizing incurred subcontractor costs for purposes of progress billing until "payment by cash, check, or other form of actual payment" had actually been made. See 67 Federal Register 70520 (Nov. 22, 2002). The Government form used to request progress payments, the Standard Form (SF) 1443, Request for Progress Payments, implemented the paid cost rule by requiring large contractors to identify "paid costs eligible under progress payments clause" (Line 9) and "incurred costs eligible under progress payments clause" (Line 10). See FAR 53.301-1443 (2008) (last updated in October 1982). Bizarrely, however, when the paid cost rule was eliminated in 2002, the SF 1443 was not updated to remove these two lines. Now -- a mere six years and eight months since the elimination of the paid cost rule -- the FAR Councils have finally issued a revised SF 1443, removing Lines 9 and 10 and thereby eliminating the last vestiges of the long-defunct rule. See 74 Federal Register 28430 (Jun. 15, 2009).
 

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On May 29, 2009, President Obama signed into law the Fraud Enforcement and Recovery Act of 2009 ("FERA").[1] FERA implements a number of sweeping changes to the False Claims Act ("FCA"), including a provision that expands significantly the circumstances under which a contractor may be held liable under the so called "reverse false claims" theory.
 

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Currently before Congress are at least two bills that could significantly increase government contractors’ liability and strengthen whistleblowers’ power to sue on behalf of the government. Senators Chuck Grassley (R-Iowa) and Patrick Leahy (D-Vermont) are spearheading a bipartisan effort to revise the False Claims Act (FCA), the government’s primary tool to recover damages for fraud related to government contracts. Under the FCA, the government may recover treble damages for false claims in addition to a $5,500 to $11,000 penalty per claim. The qui tam provisions of the FCA permit whistleblowers (called “relators”) to sue on behalf of the government and receive up to 30 percent of the government’s total recovery. Since 1986, the government has recovered over $22 billion through the FCA.

Both Senate bills would overturn court decisions that the sponsors (and the plaintiffs bar) allege were too friendly to contractors. The first bill, the Fraud Enforcement and Recovery Act of 2009 (FERA), would expand FCA liability, particularly for subcontractors. The second bill, the False Claims Act Clarification Act of 2009 (FCACA), would eliminate the public disclosure defense and give relators new procedural advantages. Interestingly, as we discussed here, the Department of Justice (DOJ) is already on record questioning the need for some of these provisions in earlier proposed legislation.
 

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On February 17, 2009, President Obama signed into law the American Recovery and Reinvestment Tax Act of 2009 ("the Act" or "the Stimulus Bill") (P.L. 111-5) (H.R. 1). As widely reported in the media, the Stimulus Bill includes approximately $787 Billion in government spending and tax cuts. With regard to the government spending provisions (Division A of the Act, which appropriates approximately $520 Billion), the U.S. Government (as well as the State and local governments receiving this money) will disburse the funds through a number of different vehicles – namely government contracts, grants, cooperative agreements, and other transactions. The legislation is intended to deal with, on an expedited basis, economic conditions that many Americans have not experienced in their lifetimes and for which they want an accelerated cure. Those familiar with the federal acquisition and grant processes, however, know that immediacy is not built into those processes. Moreover, to the extent that the “need for speed” overtakes process, recipients of the funds will almost assuredly find themselves downrange from one of the most rigorous oversight regimes ever enacted. Companies, and even States and localities – should familiarize themselves with the full terms of the Faustian bargain they will be striking.  

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With its recent decision in Allison Engine Co. v. U.S. ex rel. Sanders, the Supreme Court has resolved the conflict among the circuits over whether plaintiffs must show "presentment" of a false claim to establish liability under two False Claims Act (FCA) provisions, 31 USC §§3729(a)(2) and (a)(3).  Finding no requirement that a claim be directly presented to the government, the Court nevertheless limited the scope of FCA liability by requiring actions brought under §3729(a)(2) to "prove that the defendant intended that the false record or statement be material to the Government's decision to pay or approve the false claim."  Similarly, an action based on an alleged conspiracy under §3729(a)(3) "must show that the conspirators agreed to make use of the false record or statement to achieve this end."  While settling a prominent issue of FCA jurisprudence, the Court's opinion raises other issues of particular relevance to government contractors at the subcontract level.  These issues are addressed following a summary of the Allison decision.

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On April 23, 2008, the U.S. House of Representatives passed H.R. 3033, "Contractors and Federal Spending Accountability Act," agreeing by voice vote that GSA would maintain a centralized database of government contractors.  The GSA database would collect information on contract defaults, suspensions, and debarments, as well as "any civil or criminal proceeding, or any administrative proceeding" for which a contractor paid at least $5,000 in restitution, that has been "concluded" by the federal or state governments.  If a contractor committed in a three-year period more than one offense for which it could be debarred, the contracting officer must affirmatively demonstrate the contractor's responsibility prior to award.

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On February 27, 2008, the Senate Judiciary Committee held hearings debating whether the civil False Claims Act, 31 U.S.C. §§ 3729-3733, should be expanded – potentially creating additional liability for companies receiving any government money, reducing the ability of any such company to defend itself against claims of fraud, and creating significant hurdles for companies in defending themselves against mere allegations of fraud by "whistleblowers" from the company and within the Government.  When the Department of Justice testified before the Committee, the DOJ indicated that it did not support the legislation as currently drafted, noting that there was "no pressing need" for changes to the FCA at this time despite the fact that the proposed legislation would provide greater opportunities for the DOJ to recover allegedly fraudulent payments to contractors.  The DOJ’s objections, however, which are outlined below, are limited in scope.

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For the second time in as many terms, the U.S. Supreme Court will consider a case testing the scope of the False Claims Act (FCA), 31 U.S.C. § 3729.  The High Court has agreed to review U.S. ex rel. Sanders, et al. v. Allison Engine Co., 471 F. 3d 610 (6^th Cir. 2006), cert. granted, 2007 WL 2374900 (Oct. 29, 2007), which held that the FCA applies to a contractor’s claim for payment, regardless of whether the claim was “presented” directly to the government.  The Court’s latest interpretive review of the FCA follows a decision last March clarifying the requirement that private FCA plaintiffs have direct and independent knowledge of their allegations in order to establish “original source” jurisdiction.  Rockwell Int'l Corp. v. U.S., 127 S. Ct. 1397 (2007).  Like Rockwell before it, Allison Engine merits close attention by companies doing business with the federal government.

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