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Revisions to Federal False Claims Act Increase Contractors’ Risk

Any contractor who works on federal public projects knows that the False Claims Act, 31 U.S.C. § 3729 (the “FCA”), can pose serious risks for the unwary. The FCA imposes liability on any person who submits a claim to the federal government that he or she knows is false. Fines for violations of the FCA include $5,500 to $11,000 per violation, plus three times the amount of damages which the government sustains resulting from the false claim.

On May 20, 2009, President Obama signed the Fraud Enforcement Act of 2009 (FERA). Among other things, FERA was designed to strengthen the FCA in the wake of some recent court decisions which tempered the FCA’s strength. These changes substantially increase the legal risk to government contractors, and make thorough FCA training a crucial aspect of any public job.

First, FERA eliminates the requirement that a false claim be presented to a federal official, or that such a claim directly involve federal funds. According to the Senate Judiciary Committee report accompanying the legislation (S. Rep. No. 111-10), FCA liability now “attaches whenever a person knowingly makes a false claim to obtain money or property, any part of which is provided by the Government without regard to whether the wrongdoer deals directly with the Federal Government; with an agent acting on the Government’s behalf; or with a third-party contractor, grantee, or other recipient of such money or property.” This change authorizes the government to enforce the FCA against fraud by direct recipients of federal money, and potentially for as far as the federal money extends into the economy as long as the wrongdoer knows that the money is used to advance a government interest. For practical purposes, this means that the risk of FCA scrutiny exists when any part of the funding of a project is provided by the federal government, even when a project is funded predominantly by state and local funds. As federal stimulus dollars are being used to fund projects at all levels of government, this change to the FCA poses a significant new risk to public contractors.

Second, FERA expands the FCA’s reverse false claim liability. The “reverse” false claim provision in the FCA makes it illegal for a defendant to misrepresent the facts to avoid paying an “obligation” owed to the government. Under the former version of the law, a person or entity was liable for retaining money owed to the government only if that entity used a false statement for the purpose of concealing, avoiding, or decreasing an obligation to the government. FERA provides that the term “obligation” includes the knowing retention of an overpayment. Thus, even if the contractor was not aware that its claim was false when submitted (i.e., the contractor did not “knowingly” submit a false claim), once it discovers the falsity, it must promptly repay the Government or face FCA liability.

FERA also specifies a lower applicable materiality requirement for claims. False statements are actionable under the FCA only if they are “material” to the government’s decision to pay a claim. Some courts have ruled that the FCA’s materiality requirement meant the inaccuracy must have been crucial to the government’s decision to pay the claim. FERA overturns that standard. The FCA now defines “material” as anything “having a natural tendency to influence, or being capable of influencing, the payment or receipt of money or property.” Thus, under FERA, a falsehood could be considered “material” even if it had little or no impact on the government’s payment decision.

FERA also makes three significant amendments to the “whistleblower” provisions of the FCA. First, it expands protection for whistleblowers who lawfully attempt to stop a violation of the FCA. Second, it permits whistleblower plaintiffs to access information gained from government subpoenas. And lastly, it effectively expands the statute of limitations for FCA actions involving whistleblower complaints, by providing that government lawsuits “relate back” to earlier whistleblower complaints.

FERA is meant to clarify and strengthen the FCA in order to give the government greater recourse against alleged false claims by government contractors. A review of the current enforcement standards and training for job personnel who may interact with or submit claims to the federal government is recommended to avoid FCA violations.