The Expansion Of The Civil False Claims Act Under S. 386

Article by Richard O. Duvall , Allison V. Feierabend , Christopher A. Myers and John P. Rowley III

Originally published March 16, 2009

Richard Duvall , Christopher Myers and John Rowley III, Northern Virginia office.
Allison Feierabend, Washington office.

The Senate Judiciary Committee, with bipartisan support, recently voted to report out S. 386, the Leahy-Grassley Fraud Enforcement and Recovery Act of 2009. S. 386 would strengthen regulatory provisions involving mortgage, securities and financial fraud, and significantly expand the reach of the False Claims Act, 31 U.S.C. §3729, et seq. (FCA). The focus in this client alert is on the proposed amendments in S. 386 to the FCA.

Background

Proposals for sweeping changes to the False Claims Act were introduced in the prior (110th) Congress as S. 2041 and H.R. 4854 (both called The False Claims Corrections Act), and as H.R. 3180 (The Whistleblower Recovery Act of 2007). Although none of these bills passed, it was clear by early 2008 that there was strong support for broadening the FCA. Then, in June 2008, the Supreme Court unanimously decided Allison Engine Co., Inc. v. United States ex rel. Sanders¹ (Allison Engine), and applied a plain language construction to §§3729(a)(2) and (a)(3). In so ruling, the Court adopted an analytical approach similar to that used by the D.C. Circuit in United States ex rel. Totten v. Bombardier Corp.² (Totten) (holding that an allegedly false claim submitted to Amtrak did not violate §3729(a)(1) because there had been no presentment to an officer or employee of the United States). Faced with the Allison Engine decision, Senators Leahy and Grassley decided to carve out from S. 2041 the provisions that were necessary to reverse Allison Engine and Totten, and to introduce those as S. 386 for early consideration. The remaining amendments from the prior bills were set aside for separate consideration.³ As recently as March 12, Senators Leahy and Grassley wrote the Senate Majority Leader and Senate Republican Leader asking that the Senate consider S. 386 without delay.⁴

The press release trumpeting the filing of S. 386 states that the bill will "improve the False Claims Act to clarify that the Act was intended to extend to any false or fraudulent claim for government money or property, whether or not the claim is presented to a government official or employee, whether or not the government has physical custody of the money, and whether or not the defendant specifically intended to defraud the government." This proposal to amend the FCA comes on the heels of the FAR Council's issuance late last year of new mandatory disclosure rules for FCA violations. (See 73 F.R. 67090, et seq., November 12, 2008). These rules will amplify the impact from S. 386's enlargement of the FCA's coverage.⁵ Further, S. 386 would cause potential FCA liability to "follow the money," as the government injects unprecedented increases in federal expenditures into the banking system and other sectors of the economy through the Troubled Asset Relief Program (TARP), the Economic Stimulus Package, and by more "usual" budgetary funding.

Discussion Of Amendments

1. Elimination Of The Presentment Requirement

S. 386 would eliminate a requirement for direct presentment by amending both FCA §3729 (a)(1) and redefining "claim." FCA §3729(a)(1) establishes liability for any person who "knowingly presents, or causes to be presented, to an officer or employee of the United States Government or a member of the Armed Forces of the United States a false or fraudulent claim for payment or approval" (italics supplied). S. 386 would delete the italicized language and broadly expand the reach of the FCA by eliminating the requirement that the claim be presented to a representative of the federal government.⁶

2. Modification Of The Definition Of "Claim"

Under S. 386, "claim" is defined to include requests and demands for money or property whether submitted: (i) directly to the government, or (ii) to a contractor, grantee or other recipient to be paid or reimbursed by government funds in furtherance of a government interest.⁷ The definitional change will likely have a profound impact not only because of the foundational importance of "claim" in the application of §3279(a)(1)(2)and (3),⁸ but also because the vast majority of FCA cases have in the past and are likely in the future to involve one or more of these provisions.

The elimination of the requirement of direct presentment would create potential FCA liability in a wide array of situations in which federal jurisdiction formerly did not exist. If S. 386 passes, a contractor building a dormitory at a state university, where the project is funded in whole or in part by federal funds, may have liability under the FCA to the same extent as if the contractor were performing the work directly for a federal agency.⁹ The key to FCA coverage would be whether the government provided (by advance, payment or reimbursement) any portion of the funds paid to the contractor, and whether the work was in furtherance of a government interest. This "horizontal" expansion of the FCA's scope would increase opportunities for qui tam relators and their counsel to push the envelop of FCA liability by turning virtually every breach of contract into an FCA lawsuit.¹⁰ The proposed legislation will increase litigation, as well as the expenses associated with working on federal, state and local projects that involved "upstream" funding with federal dollars.

3. Modification Of Current 31 USC 3729(a)(2), Which Becomes §3729(a)(1)(B) In S. 386

S. 386 seeks to reverse one of the critical holdings of Allison Engine: that in order to establish liability under current §3729(a)(2), the United States, or a relator on its behalf, must show that the false record or statement was used "to get" a false or fraudulent claim paid. S. 386 would modify §3729(a)(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") (emphasis added) by establishing a violation under proposed §3729(a)(1)(B) if a person "knowingly makes, uses, or causes to be made or used, a false record or statement material to a false or fraudulent claim" (emphasis added). This change eliminates the phrase "to get," which requires a direct connection between the false statement and the false claim, and substitutes the phrase "material to."¹¹

Under S. 386, the requisite nexus for §3729(a)(1)(B) liability would be satisfied if the person made or used a false record or statement that was "material" to a false or fraudulent claim. S. 386 defines "material" as "having a natural tendency to influence, or be capable of influencing, the payment or receipt of money or property."¹² S. 386 uses the term "material" only in §3729(a)(1)(B) (amending §3729(a)(2)) and §3729(a)(1)(G) (amending (a)(7)).¹³

The changes to §3729(a)(2) would expand FCA liability into areas in which it did not previously exist under Allison Engine, and thus contribute to an increase in the number of FCA cases. The government may be able to meet the "materiality" standard by offering after-the-fact testimony by the Contracting Officer that the alleged false statement or record would have made a difference in the decision to pay. Under the existing statute, the sufficiency of the nexus between the alleged false statement or record and the payment focuses on the contractor's purpose. S. 386 changes the focus to the impact of the statement or record on the payment decision by the government (i.e., does the statement or record have a "tendency to influence" or is it "capable of influencing, the payment or receipt of money or property"). See S. 386, Sec. 4(a)(1)(b)(4). A Contracting Officer's self-serving testimony that the alleged false statement or record would have affected her payment decision is difficult for a contractor to rebut and, even in the absence of other evidence, may be sufficient to allow the government to get the issue to the jury.

4. Modification Of The Conspiracy Provision (Current 31 U.S.C. §3729(a)(3), Which Becomes 31 U.S.C. §3729(a)(1)(C) In S. 386)

S. 386 also would enlarge the conspiracy provisions of the FCA. Under the current statute, as the Court in Allison Engine held, the government must show that the conspirators "had the purpose of 'getting' the false record or statement to bring about the Government's payment of a false or fraudulent claim."¹⁴ As revised in S. 386, the conspiracy provision would establish liability for any person who conspires to commit a violation of any of the other liability provisions of the FCA (i.e., under the bill's designations, §3729 (a)(1)(A),(B),(D),(E), (F), or (G)). This change eliminates the requirement that the conspiracy have the specific purpose of getting a false or fraudulent claim paid or approved. The amendment likely would increase the use of the conspiracy provision, and thus the number of defendants in FCA cases. Indeed, there will be incentives for qui tam relators to add multiple parties under the new conspiracy provision, if for no other reason than multiple parties increase the number of potential contributors to a settlement.

5. Modifications To The Reverse False Claims Provision

Finally, S. 386 modifies current §3729(a)(7) to impose liability for knowingly making, using or causing to be made or used, a false record or statement that is "material to an obligation to pay or transmit money or property to the Government or knowingly conceals or improperly avoids or decreases an obligation to pay or transmit money or property to the Government." Section 4(b)(3) of S. 386 broadly defines "obligation" as "a fixed duty, or a contingent duty arising from an express or implied contractual, quasi-contractual, grantor-grantee, licensor-licensee, fee-based, or similar relationship, and the retention of any overpayment.¹⁵ The amendments create an FCA violation for knowingly and improperly¹⁶ avoiding the repayment of money or property to the United States, with or without the use of a false record or statement. Presumably, the "knowingly and improperly" standard will provide a defense to contractors who decline to pay the government based on a reasonable and good-faith belief that no payment is owed. However, if the government does not believe that the contractor has a valid basis for refusing to pay, the amendments to this provision would give the government a heavy-handed weapon – namely, the threat that continued refusal would be "knowing and improper" in violation of the FCA. Whether the government will use this provision to threaten contractors with FCA liability when the contractor refuses to pay a disputed obligation remains to be seen.¹⁷

6. Retroactivity

The amendments to S. 386 will generally apply to conduct "on or after the date of enactment" (S. 386, Sec. 4 (b)). But S. 386 would make section 3729(a)(1)(B) (amending 31 U.S.C. §3729(a)(2)) retroactive to the date of the Allison Engine decision (i.e., June 7, 2008).¹⁸ Conduct occurring between June 7, 2008 and the date of passage of S. 386 that would not violate §3729(a)(2) – as construed by the Supreme Court in Allison Engine – could be made into an after-the-fact violation by the broader corresponding section of S. 386 (§ 3729 (a)(1)(B)).

Although the FCA is civil and remedial in nature, any attempt to give the legislation retroactive effect would be subjected to challenge in the courts. See, e.g., United States v. Bekhrad, 672 F. Supp. 1529 (S.D. Iowa 1987) (attempt to retroactively increase FCA penalties). The Supreme Court has the constitutional power to interpret the laws and the retroactivity provision would cast doubt on the fundamental fairness of S. 386. Apparently, the advocates of retroactivity view the proposed change to §3729(a)(2) as merely "clarifying" statutory intent that pre-dated the Supreme Court's "wrong" decision in Allison Engine. If the retroactivity provision is included in a final legislation,¹⁹ however, a challenge to the provision would implicate a basic separation of powers question: whether Congress or the Supreme Court has the final authority to interpret the meaning of statutes previously enacted by Congress.²⁰

Other Comments

The Senate Judiciary Committee considered other "improvements" to S. 386. Fortunately, from the perspective of contractors, S. 386 retained "damages" as a standard for liability in addition to civil penalties, and did not base liability on the amount the government paid on account of the alleged violation.

As noted above, S. 2041 and other prior bills, included many additional proposals for "correction" of the FCA that are not included in S. 386. However, the argument for further "correction" of the FCA – certainly for provisions that would strengthen the qui tam provisions – has been substantially diluted by the new mandatory disclosure requirements under the Federal Acquisition Regulation. (See 73 F.R. 67090-93, November 12, 2008.) Under these amendments, contractors have an affirmative obligation to disclose credible evidence of violations of the FCA, with suspension and debarment remedies being available where a principal of a contractor knowingly fails to make timely disclosure. Mandatory disclosure more than serves the purposes of the qui tam provisions of the FCA.

There is a significant chance that S. 386, or something like it, will be enacted by Congress in the near future. The shape of this legislation will impact the risk contractors face in the highly regulated environment in which they work, and inform judgments as to internal controls and loss prevention strategies. Contractors should also consider how amendments to the FCA will affect their disclosure obligations under FAR Part 3.1003 and FAR 52.203-13, and as flowed down to subcontracts under FAR 52. 203-13(d).

Footnotes

1. 128 S. Ct. 2123 (2008).

2. 380 F. 3d 488 (D.C. Cir. 2004).

3. S. 458 (The False Claims Clarification Act of 2009) includes many other amendments to the FCA. Senator Grassley, joined by Senators Durbin, Leahy and Specter, introduced S. 458 on February 24, 2009; Congress will consider it in the months ahead.

4. Presently there is a "hold" on the bill. We speculate that the "hold" involves certain technical changes being sought to S. 386 as reported out of the Senate Judiciary Committee.

5. Contractors are required to timely notify the government (generally the Office of Inspector General and the Contracting Officer) when they have knowledge of "credible evidence" of an FCA violation. Failure to comply can result in debarment or suspension, breach of contract, or downgraded past performance evaluations. See amendments to FAR Parts 3, 9, 42 and 52, 73 Fed. Reg. 67090-92, November 12, 2008.

6. S. 386 adds a new subsection with technical changes that cause the provisions at §3729(a)(1)-(7) to be re-designated §3729(a)(1) (A)-(G), respectively.

7. The term 'claim'

8. Technical changes in S. 386 would cause these sections to be re-designated as §3729(a)(1)(A)-(C), respectively.

9. This is new ground with potentially significant problems in tracing federal money to particular transactions or matters. Enactment of S. 386 might open the door to uses of the FCA that have traditionally been left to other enforcement mechanisms. The FCA is not only a heavy hand, it is one that cannot easily be controlled even by the federal authorities. For example, qui tam relators and their counsel obtain financial interests through litigation; the government rarely moves to dismiss qui tam suits, even if its investigation has failed to substantiate the relator's allegations; if the government declines to intervene, the relator has the option to proceed with the litigation.

10. See U.S. ex rel. Wilson v. Kellogg Brown & Root, Inc., 525 F. 3d 370 (4th Cir. 2008). (The court characterized as a "misguided journey" the relator's effort to shoehorn what is a breach of contract action into a violation of the FCA.)

11. Because this defined term is not used in other sections describing violations of the FCA, the government can be expected to argue in future cases that no other such section includes a materiality requirement.

12. A significant number of courts have required the application of a materiality standard when deciding whether a person violated the FCA. See, e.g., United States ex rel. Harrison v. Westinghouse Savannah River Co., 352 F.3d 908, 914-15 (4th Cir. 2003).

13. Because this defined term is not used in other sections describing violations of the FCA, the government can be expected to argue in future cases that no other such section includes a materiality requirement.

14. Allison Engine, 128 S. Ct. at 2130.

15. Senator Jon Kyl has proposed an amendment to define "obligation" as a "fixed duty, or a contingent duty arising from an express or implied relationship based on a contract, grant, license, or fee, or a similar relationship, including a duty to return any overpayment after expiration of any period or process for reconciling such overpayment." This amendment addresses concerns that under S. 386 there could be reverse false claims exposure where a person in good faith holds monies subject to an agreed reconciliation process. Under Senator Kyl's amendment, persons holding funds in contemplation of a true up or other agreed process would have a duty to return any overpayment when the process was completed – but, by implication, would not have liability for merely holding funds awaiting completion of the agreed process.

16. "Improperly" is undefined. Late changes to S. 386 added "knowingly" to the last clause of the 3729(a)(1)(G) in response to a concern that "improperly" alone would result in confusion and extensive litigation over whether the "knowingly" scienter standard applied to the conduct alleged to be in violation.

17. See S. 386, Sec. 4 (a)(1)(a)(G).

18. See Discussion of Changes, section 3, above.

19. Senator Kyl has introduced an amendment that would eliminate the provision for retroactivity, and make the entire bill prospective in application. Given the problems with retroactivity in this context, it seems likely that Senator Kyl's amendment will eventually be adopted.

20. Since Marbury v. Madison, 5 U.S. (Cranch 1) 137 (1803), there has been clarity concerning the Supreme Court's power of judicial review. Perhaps among its other unintended consequences, S. 386 and its retroactivity feature might raise questions of whether Congress can retroactively overrule the Supreme Court on an issue of statutory interpretation involving a penal statute.

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