5 February 2010

A New 'All Purpose Anti-Fraud Act? Are You In Compliance? - Recent Amendments To The Federal False Claims Act Have Very Significantly Expanded Its Reach, And The Activities Of Many More Entities May Now Be Covered

Are you running afoul of what might be called the new federal "All Purpose Anti-Fraud Act"? Recent amendments to the federal False Claims Act have very significantly expanded its reach, and the activities of many more entities may now be covered.
United States Criminal Law
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Originally published in Anderson Kill's Commercial Litigation Advisor (Winter 2009).

Are you running afoul of what might be called the new federal "All Purpose Anti-Fraud Act"?
Recent amendments to the federal False Claims Act have very significantly expanded its reach, and the activities of many more entities may now be covered. Since very heavy damages and penalties may be imposed without a specific intent to defraud, it makes sense to determine whether you have exposure and to take prophylactic measures to reduce that risk and exposure.

Prior Supreme Court Law

In 2008, the United States Supreme Court held that a request for payment submitted to a private entity that received federal funds was not subject to the federal False Claims Act, unless the request was made with the specific intent of getting the government to pay (as opposed to simply getting the private entity to pay). Since government funds are received by so many private entities under so many programs, the Supreme Court unanimously decided that to hold otherwise would turn the False Claims Act into "a general all-purpose anti-fraud statute." Allison Engine Co. v. United States ex rel. Sanders, 128 S. Ct. 2123, 2126 (2008).

Congress "Overrules" Supreme Court

But Congress disagreed. To set the Supreme Court straight, it passed the Fraud Enforcement and Recovery Act of 2009 ("FERA"), which provided "clarifications to the False Claims Act to reflect the original intent of the law." In passing FERA, Congress amended the provisions of the False Claims Act to effectively overrule the Supreme Court's prior holding: FERA now includes within the reach of the False Claims Act requests for payment that are made to private entities if the Government provides "any portion of the money or property" requested, and if that money or property was "to be spent or used on the Government's behalf or to advance a Government program or interest." 31 U.S.C. § 3729(a) (2009). In short, the False Claims Act now appears to be what the Supreme Court described as a "general all-purpose anti-fraud statute."

Perhaps your reaction is: "That's (mildly) interesting, but so what? How does that affect me?" Well, here's how. First, since Government programs and money are so far-reaching, you need to check whether any of the private entities to which you are making requests for payment (say requests for contract payments), are going to be making payment to you from funds that are supplied by, or will be reimbursed by, the federal Government. Second, if your requests for payment fall within the reach of the False Claims Act, you need to perform an internal audit to see whether you are perhaps unwittingly, yet "knowingly," submitting a false claim.

No Intent to Defraud Required

Many people will intuitively think of the False Claims Act as requiring an intent to defraud. Since they have no such intent, they believe they have nothing to worry about. Wrong! For starters, a claim can be viewed as "false" if it is not accurate — it does have to contain deliberate lies. The question then becomes what state of mind did the person submitting the "false" claim have: was it submitted "knowingly." The definitional sleeper here is that "no specific intent to defraud" is required in order to act "knowingly" under the False Claims Act. For example, if a person or entity acts "in reckless disregard" of the truth or falsity of information," then they act "knowingly" within the meaning of the False Claims Act. Or if they act in "deliberate ignorance of the truth or falsity," then they also act "knowingly."

In short, putting just these two factors together, it is very possible that activities that an entity may view as routine and as "the way we have always done it," are now subject to liability pursuant to the False Claims Act as amended by FERA — the new federal "all purpose anti-fraud statute."

Payment By Private Entity Included If Federally Funded

For example, suppose a construction subcontractor submits periodic requests for payment on a construction job and each payment to be made is dependent upon the percentage of the work that has been completed thus far. Say the subcontractor submits a claim for payment based upon fifty percent of the work being completed but, in fact, it is only 40 percent completed. The subcontractor does not have a very sophisticated method of determining the percent completed. If the construction project is being funded in part by funds of the Federal Government, then the requisition will be covered by the False Claims Act even if submitted to a private entity. The question then arises as to whether the subcontractor acted "recklessly" with respect to its requisition for payment based upon the inaccurate statement that fifty percent of the work is completed. Perhaps the subcontractor has used its flawed method for years but there are facts that would indicate that it was reckless not to review that method and update it.

Government programs and funding involve not only defense contractors, but hospitals and other health providers, universities and not-for-profits, and businesses in many, many different fields. The federal government has recently distributed millions of dollars through the American Recovery and Reinvestment Act and the Troubled Assets Relief Program. Since government funds are used in these situations to "advance a government program or interest," requests for payment made to private entities receiving these funds will be subject to the False Claims Act.

Enormous Exposure

An allegation that the False Claims Act has been violated can lead to very serious practical difficulties and, if proven or settled, to extensive remedies. The statute provides for treble damages — i.e., three times the amount of damages that the government sustains. In addition, there is liability for a civil penalty of $5,000 to $10,000 (to be adjusted by inflation) for each violation. It frequently happens that there are multiple requests for payments, and courts have imposed multiple penalties even where the claims are all made on the same project or contract. If the practice involved has been implemented over many years, the penalties alone can be very significant.

Because of the extensive exposure, entities faced with an allegation of liability under the False Claims Act can be placed in a very difficult practical position. Even if they believe they are innocent of any violation and did not act "recklessly" or with "indifference," there is always the risk that a judge or jury will come to a different conclusion. Mounting a defense can also entail a significant investment of time and money. Insurers may decline coverage for payments resulting from False Claims Act allegations. As a practical matter, these risks can place considerable pressure upon an entity to settle.

Then there are the whistleblower provisions. The False Claims Act encourages the reporting of violations by offering private parties the ability to bring an action on the government's behalf and to obtain a percentage of the government's recovery if the suit is successful. The whistleblower may obtain from 15 to 30 percent of the government's recovery (including the treble damages) and can also obtain attorneys' fees and expenses from the defendant.

What To Do

The single most important step that entities can take is to have in place an effective compliance program, one which will identify situations in which the False Claims Act applies and employ effective mechanisms to ensure that requests for payment are in accordance with all contractual and regulatory provisions. Since nothing works perfectly, and there is always the possibility of human error (or worse), the program should include a method by which employees and other persons with information can alert management to existing or potential problems.

John M. O'Connor, a shareholder in the New York office of Anderson Kill, is a member of the firm's commercial litigation department. Mr. O'Connor, a former Assistant United States Attorney, has litigated False Claims Act issues. He is an experienced trial and appellate litigator and often writes on topics concerning the False Claims Act.

About Anderson Kill & Olick, P.C.

Anderson Kill & Olick, P.C. practices law in the areas of Insurance Recovery, Anti-Counterfeiting, Bankruptcy, Commercial Litigation, Corporate & Securities, Employment & Labor Law, Real Estate & Construction, Tax, and Trusts & Estates. Best-known for its work in insurance recovery, the firm represents policyholders only in insurance coverage disputes, with no ties to insurance companies and no conflicts of interest. Clients include Fortune 1000 companies, small and medium-sized businesses, governmental entities, and nonprofits as well as personal estates. Based in New York City, the firm also has offices in Greenwich, CT, Newark, NJ, Philadelphia, PA, Ventura, CA and Washington, DC. For companies seeking to do business internationally, Anderson Kill, through its membership in Interleges, a consortium of similar law firms in some 20 countries, assures the same high quality of service throughout the world that it provides itself here in the United States.

The information appearing in this article does not constitute legal advice or opinion. Such advice and opinion are provided by the firm only upon engagement with respect to specific factual situations

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