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.
The Allison Engine dispute involved subcontracts to supply generator sets (gen-sets) used in the Navy’s Arleigh Burke-class guided missile destroyers. Prime contractors Bath Iron Works and Ingalls Shipbuilding subcontracted with Allison Engine Company to build gen-sets in more than fifty destroyers. Allison subcontracted the assembly of the gen-sets to General Tool Company, which in turn subcontracted part of its work to Southern Ohio Fabricators. The relators, former employees of General Tool Company, filed qui tam actions against all three subcontractors alleging that the defendants submitted claims for payment to the prime contractors despite knowing that the gen-sets failed to comply with contract specifications and Navy regulations.
The district court granted judgment as a matter of law to the defendants, holding that FCA liability attaches only to claims actually presented to the government. Although the subcontractors were paid with government funds, their claims were submitted to the prime contractors – not to the government.
On appeal, the Sixth Circuit reversed, finding actual presentment unnecessary under the FCA, so long as a contractor’s payment derives from the public fisc.
The FCA states in relevant part:
Any person who:
1) knowingly presents, or causes to be presented, to an officer or employee of the Unites States Government or a member of the Armed Forces of the United States, a false or fraudulent claim for payment or approval;
2) 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; [or]
3) conspires to defraud the Government by getting a false or fraudulent claim allowed or paid
…is liable to the United States Government for a civil penalty of not less than $5,000 and not more than $10,000, plus 3 times the amount of damages which the Government sustains because of the act of that person…
Finding an explicit presentment requirement only in subsection (a)(1), the Sixth Circuit held that subsections (a)(2) and (a)(3) cover false claims submitted to parties other than the government so long as the claim will be paid with federal funds.
In vacating the Sixth Circuit’s decision, a unanimous Supreme Court agreed that the Court of Appeals’ interpretation impermissibly broadened the reach of FCA liability. Although subsections (a)(2) and (a)(3) do not require the plaintiff to establish presentment, it is insufficient for the plaintiff to show merely that federal government money was involved. Rather, the FCA requires a direct connection between the false statement and payment by the government. In the Court’s words:
If a subcontractor or another defendant makes a false statement to a private entity and does not intend the Government to rely on that false statement as a condition of payment, the statement is not made with the purpose of inducing payment of a false claim "by the Government." In such a situation, the direct link between the false statement and the Government’s decision to pay or approve a false claim is too attenuated to establish liability.
Thus, to establish a subcontractor’s liability under the FCA, a plaintiff must demonstrate that the subcontractor submitted a false statement to a prime contractor with the purpose of getting the government to pay its claim. FCA liability does not attach to a subcontractor that makes a false statement to a prime contractor with no intent that the government rely on that statement as a condition of payment. This standard raises some important questions for subcontractors performing under a federal contract:
- Under the Court’s knowledge requirement for proving liability under subsections (a)(2) and (a)(3), can a subcontractor "intend" that his false record or statement induce payment by the government if the subcontractor is not privy to the structure of the prime contract, i.e., whether the contract is a firm fixed price, fixed price incentive fee, or cost plus fixed fee arrangement?
- Whose intent matters? Is respondeat superior sufficiently broad to capture a false statement made by an employee who has no knowledge of whether the cost is ultimately paid by the government when the component of the company that submits the bill has no knowledge of the falsity? In this regard, consider U.S. v. United Technologies Corp., 51 F. Supp. 2d 167 (D. Conn. 1999). There, the court rejected a "corporate knowledge" theory of liability, but did so for fact-specific reasons, i.e., that the employee accused of making a false record was unaware that his representations were false. Does the Allison Engine knowledge standard support a "collective knowledge" theory of FCA liability?
- Is knowledge that the government will ultimately reimburse the prime contractor, standing alone, sufficient to infer an intent that the false statement serve as the basis for payment?
- If a subcontractor specifically "intends" only that a false record or statement be used to obtain an award of a government contract, rather than payment by the government, can an intent to be paid by the government nevertheless be implied?
Such questions will likely confront courts in subsequent FCA matters involving alleged fraud by subcontractors at all tiers in the procurement chain. The Allison Engine decision nevertheless offers welcome certainty that FCA claims against subcontractors will be limited, as they should be, to conduct designed to induce payment by the federal government.