In a December 2020 speech, Deputy Assistant Attorney General Michael Granston warned that cybersecurity fraud could see enhanced enforcement under the False Claims Act ("FCA"). On October 6, 2021, Deputy Attorney General Lisa Monaco announced that the Department of Justice ("DOJ") would be following through on that warning with the launch of the DOJ's Civil Cyber-Fraud Initiative. The key component of the initiative is the use of the FCA against Government contractors and subcontractors that fail to comply with cybersecurity requirements, including information security standards and cyber incident reporting obligations, imposed by contract, statute, or regulation.
Under the FCA, the Government can recover treble damages and penalties from federal contractors and subcontractors that knowingly submit false claims for payment. Notably, the FCA incentivizes private citizens (relators), including contractor employees, to file qui tam suits on behalf of the Government by guaranteeing them between 15 and 30 percent of the recovery. DOJ stated that it intended to work with federal agencies, subject matter experts, and law enforcement partners on the Civil Cyber-Fraud Initiative. Recently, Assistant Attorney General Brian Boynton confirmed that this initiative was also intended to incentivize relators and the aggressive relators' bar to focus their attention on potential cybersecurity noncompliance as the basis for qui tam actions.
I. Building on Past FCA Enforcement
Although DOJ's Civil Cyber-Fraud Initiative emphasizes the use of the FCA to pursue alleged noncompliance with cybersecurity regulations, the FCA has already been used for that purpose several times. In May 2019, a federal district court in California declined to dismiss a case alleging that a Government contractor had falsely asserted its compliance with cybersecurity standards when entering into Department of Defense contracts.1 And in July 2019, DOJ announced that another contractor had agreed to pay more than $8 million in connection with resolving a qui tam suit alleging failure to meet federal cybersecurity standards, marking the first settlement based on FCA allegations related to cybersecurity noncompliance.2
With this said, at least one court rejected the attempt to build an FCA case out of alleged deviations from cybersecurity regulations for lack of "materiality." In October 2020, the district court in the District of Columbia dismissed a qui tam suit alleging that a contractor had failed to disclose a security vulnerability in the computer systems that it sold to the United States.3 The court's dismissal was based on its conclusion that the whistleblower had failed to show that the noncompliance was material to agencies' acceptance of the computer systems and payment under the contracts. As the court noted, "the technology policies referenced . . . do not require defect-free products," and that any applicable security policy could have instead been addressed by "providing the necessary assistance to eliminate or reduce vulnerabilities as they appear."
II. Potential Types of Liability Risks
DOJ's announcement identifies several types of actions for which it intends to hold individuals and entities accountable, including knowingly providing deficient cybersecurity products or services, knowingly misrepresenting their cybersecurity practices or protocols, and knowingly violating obligations to report cybersecurity incidents and breaches.
Compounding the risk to contractors is the fact that the initiative follows numerous other initiatives over the past few years to increase cybersecurity requirements within the Government and the Government supply chain. For example, on May 12, 2021, the Biden Administration issued an "Executive Order on Improving the Nation's Cybersecurity," which intended to strengthen the Government's ability to respond to and prevent cybersecurity threats, including by modernizing federal networks, enhancing the Government's software supply chain security, implementing enhanced cybersecurity practices and procedures in the Government, and creating Government-wide plans for incident response. Moreover, the Department of Defense has taken several actions to increase obligations on contractors that handle Controlled Unclassified Information, including by requiring contractors to report NIST SP 800-171 assessment scores into the Supplier Performance Risk System, and implementing a forthcoming "Cybersecurity Maturity Model Certification" program to require contractors to undergo third party assessments of their compliance with new information safeguarding requirements.
On top of these requirements, the Government has implemented other cybersecurity related supply chain initiatives recently, such as a statutory ban applicable to virtually all Government contracts under Section 889 of the FY 2019 National Defense Authorization Act, which prohibits the Government from either (1) procuring certain covered telecommunications equipment and services from unauthorized sources ("CTE/S"), or (2) entering into an agreement with any entity that "uses" CTE/S as a "substantial or essential component of any system, or as critical technology as part of any system."4
Noncompliance with any of these myriad requirements could serve as the basis for scrutiny by the DOJ under its broad new initiative.
First, there is little doubt that the DOJ intends to move out smartly to implement its initiative. By way of example, DOJ's Procurement Collusion Strike Force initiative, announced in November 2019, has been very active, and currently has more than 30 active investigations. Lisa Monaco announced a parallel initiative to police cryptocurrency enforcement in the same speech, signaling the Department's broad willingness to assist agencies in enforcement efforts. We can expect that the DOJ will aggressively prioritize the Civil Cyber-Fraud Initiative.
Second, the DOJ announcement indicated that the DOJ would be partnering with other federal agencies and law enforcement as part of implementation of the civil initiative. It will be important to stay tuned as further details emerge about questions, such as how individual U.S. Attorney's offices will be involved in the initiative; how DOJ will partner with the OIG community in investigating matters; and how Civil Division attorneys will interact with their Criminal Division counterparts and law enforcement. For context, in less than two years, DOJ's Procurement Collusion Strike Force has grown to include roughly 500 individual investigators and attorneys who are assigned to strike force teams in 22 different U.S. Attorney's offices around the country.
Third, the initiative raises the stakes on contactor compliance programs. With the threat of the FCA's treble damages and penalties, contractors are at much greater risk when implementing required cybersecurity safeguards and when they decide whether to report a breach. Considering the scope and complexity of recently implemented cybersecurity obligations, contractors should stay abreast of the changing regulatory landscape and ensure that they have appropriate programs in place to limit their risk of being subjected to an FCA action asserted by DOJ or relators.
4. CTE/S is defined under the statute as: (i) all telecommunications equipment produced and provided by Huawei Technologies Company or ZTE Corporation and their affiliates or subsidiaries, (ii) when used for certain national security or public safety purposes, video surveillance and telecommunications equipment produced and provided by Hytera Communications Corporation, Hangzhou Hikvision Digital Technology Company, or Dahua Technology Company, and their affiliates or subsidiaries, and/or (iii) any telecommunications or video surveillance services by one of the five entities or their affiliates or subsidiaries.
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