The Implications of False Claims Act Litigation for National Security
Alan Chvotkin, Esq.
Executive Vice President and Counsel
Professional Services Council
At the
Next Generation Dialogue on Industry and Defense
Before the
Center for Strategic and International Studies
Doctor Hamre, let me thank you and CSIS for inviting the Professional Services Council to provide opening remarks on the important issue of the implications of False Claims Act litigation for national security. It certainly merits the attention of all of us in both the legal and the national security communities.
For purposes of this discussion, I want to separate that well-worn phrase of “waste, fraud and abuse” and focus only on the component labeled “fraud.” And even there I want to focus on issues relating to allegations of fraud, and discuss how it serves as a significant barrier to the federal government generally, and the Department of Defense specifically, obtaining the goods and services it needs to meet mission needs.
I don’t think it unreasonable to posit that most of us abhor fraudulent activities in contracting with the federal government. Regrettably, there are still too many guilty pleas and verdicts for fraudulent behavior against defense contractors, federal civilian employees and even uniformed military members. While there is no acceptable behavior for even “a little fraud,” we see activities that span the gamut of behaviors and dollar values. And we recognize that often the alleged fraudulent behavior is hidden and not the stuff of corporate press releases. Still, real fraud happens and the allegations of fraud increase exponentially.
PSC is a strong proponent for vigilance to root out fraud, and for the government to vigorously prosecute that behavior wherever it exists. But we have also been a vocal advocate for a balanced approach to these issues and have raised concerns about the ecosystem that exists across the federal contracting landscape that we believe compels drawing the conclusion that there are significant adverse implications for False Claims Act litigation and its related behaviors for national security. The Stats
False Claims Act cases validate the Willie Sutton rule: the prospect of large money rewards attracts both qui tam relators and their lawyers. I don’t want to imply that relators are motivated by money only. While I don’t know any qui tam relators personally, I appreciate the toll launching one of these cases has on their lives. I can’t say the same for the attorneys who take the cases on a contingency based on the recoveries they can obtain from either the judicial process or the forced settlement of cases.
According to the November 20, 2014 report by the Department of Justice, in fiscal year 2014, relators (or more likely their attorneys) received over $455 million in award shares, with more than $415 million of that stemming from cases where the government intervened.
Also in fiscal year 2014, Justice reported that 88 percent of all new false claims matters were qui tam cases—with over 700 qui tam cases filed in the last fiscal year alone. More than 700 were also filed in fiscal year 2013.
As you know, under the current procedures for qui tam relator cases, the case must be filed under seal—that means it has to be confidential—to give the Justice Department time to investigate the issues and decide whether to intervene or otherwise pursue the case. Where the U.S. government
intervened, settlements and judgments amounted to almost $30 billion in FY14. Where Justice declined to intervene, recoveries totaled just over $1 billion.
For Department of Defense activities—primarily but not exclusively contracts—almost 90 percent of the new false claims matters filed in fiscal year 2014 were qui tam suits. But that was only 52 cases. Where the U.S. government decided to intervene, the U.S. government recovered $42.6 million; where the U. S. government decided NOT to intervene, the U.S. government recovered $8.3 million.
The only good news for the defense community is that we are no longer leading the pack in cases or recoveries. In fiscal year 2014, the pharmaceutical manufacturers and financial institutions accounted for the majority of the recoveries. In the Department of Health and Human Services, almost 500 new matters were filed, with 469 of them being qui tam suits.
And size doesn’t seem to matter. Among the DoD cases, the government has pursued smaller contractors and smaller alleged frauds, as well, including a Colorado company for $2.1 million for allegedly using unapproved domestic and foreign subcontractors and a Virginia company (MPRI) for $3.2 million who allegedly submitted false labor charges (relating to Afghanistan).
But there are changes taking place in the acquisition system and in the litigation arena that may change the course of future False Claims Act actions that I’ll discuss later.
Endless Litigation
There is an also endless stream of litigation on the False Claims Act. Despite more than 160 years since this law was first enacted in 1863 during the presidency of Abraham Lincoln, and now almost 30 years since significant amendments were made to the False Claims Act statute in 1986, the courts are
continuously faced with both the simple and the complex questions about how to interpret and how to apply the law. One need only need to look at the dockets at the Supreme Court over the past several years to see the significant activity—and splits of opinions in the lower courts—on key terms and procedures under the False Claims Act.
And those splits of opinion is why PSC has recently taken the unusual step for us of filing friend of the court briefs in two significant False Claims Act cases.
Rule 9(b) Pleading (AT&T/Heath)
One case now before the Supreme Court addresses the level of detail a plaintiff must disclose in its complaint in order to satisfy the requirement that “a party must state with particularity the
circumstances constituting fraud.” Simply, the rule requires plaintiffs to allege the “who, what, when, where and how” of the fraudulent conduct, although we recognize that the exact level of particularity will differ based on the facts of each case. In layman’s terms, I say that if a plaintiff knows something, it must disclose something. It doesn’t have to tell all but the purpose of this pleading requirement is to put the defendant on notice of what the alleged fraudulent behavior is.
But there is a deep and significant conflict in the circuit courts of appeals regarding that level of
of a false claim in the complaint. Six other circuits say the plaintiff doesn’t have to provide any specific false claim.
On October 21, PSC filed a “friend of the court” amicus brief in the Supreme Court urging the high court to resolve the circuit split.1 We urged the Supreme Court to take the case during this Halloween
season to prevent the lower courts from “judicially exorcising the key requirement that allegations be made with particularity.” In our view, companies would be unwilling to take the risk of contracting with the government if an opportunist’s unfounded, unproven and unspecific allegation of fraud are enough to move costly court cases forward.
This case involves AT&T, a PSC member company, but they took no part in our decision to file our amicus brief. We were joined in this brief by the Coalition for Government Procurement.
Implied Certification (Triple Canopy/Badr)
Another False Claims Act case at the Supreme Court where we filed addresses the scope of claims for any material breach of a government contract even without any proof that any payment was
conditioned on meeting the alleged criterion.2 Here, the government asserted that Triple Canopy
falsified marksmanship scores for its guards even though there was no contractual requirement that linked those proficiency scores to specific requirements of the contract. Here, too, there are wide variations in the circuit courts about the scope of this “implied certification” requirement and the Supreme Court is being asked to resolve that “PERVASIVE AND IRRECONCILIABLE” circuit split on FCA liability.
In our amicus filing, PSC urged the Supreme Court to take up the case becausethe circuit courts of appeals have disagreed not only about the threshold question of whether implied certification is a valid theory of FCA liability at all, but also about the scope of that doctrine, where it is available.
Contractors must be accountable for the performance of their contractual obligations to the U.S. government. While we took no position on the merits of this case, we believe the Fourth Circuit’s decision adopts such an extreme view of the scope of the False Claims Act exposure that it demands Supreme Court reversal, as we said in our brief.
Other cases are examining the scope of the public disclosure bar and the original source exception, the scope of the “first to file” requirement, the effect of the plaintiff failing to keep its case “under seal” until the Justice Department completes its review, and more.
1 Available at: http://www.pscouncil.org/CommitteesandTaskForces/GeneralCounselsCommittee/GCCResources/PSC_CGP_Amicus_Brief_ -_AT_T_Inc.__et_al.__v._United_States.aspx 2 Available at: http://www.pscouncil.org/CommitteesandTaskForces/GeneralCounselsCommittee/GCCResources/PSC_NDIA_ISOA_Amicus _Brief_Triple_Canopy_v_US.aspx
This lack of consistency and uniformity in the interpretation and application of the False Claims Act means that it matters a lot where you are doing business as a contractor, the nature of your contracting, and who you are doing business with. That has implications for the willingness of companies to do business worldwide with the Department of Defense or even domestically with the department or other federal agencies.
Contract Administration
In addition, many of these False Claims Act cases arise in the context of regular contract administration and basic project performance.
Courts have begun to distinguish minor technical violations from true acts of fraud but this area of the law is still evolving, as well. One test that appears to be emerging asks whether compliance with the rule or regulation is an essential condition for the government to pay the claim. This test has broad implications for limiting False Claims Act lawsuits. Without this limitation, any technical
non-compliance with federal regulations could potentially result in false claims liability or, at the very least, an expensive lawsuit.
In a 2008 decision of the Fourth U.S. Circuit of Appeals (U.S. ex. Rel. Wilson v KBR 525 F. 3rd 370), that
court rejected a claim that purportedly deficient contract performance would constitute fraud absent allegations (and evidence) that the company entered into a contractual obligation with the
government knowing at the time of contracting that it would fail to comply.
“The False Claims Act is a fraud prevention statute,” the court said. It does not allow a qui tam plaintiff to “shoehorn what is, in essence, a breach of contract action into a claim under the … Act.”
That perspective was reaffirmed yesterday, November 2, in a qui tam case decided by the U.S. District Court in Alexandria. The court found that there were no issues of genuine material fact and that the defendant, DRS Technical Services, was entitled to judgment as a matter of law on all claims. The complaint? That the contractor created technical manuals without a government-furnished technical data package and because the final version of the operator’s manual deviated from military standards. That district court concluded that False Claims Act liability must “be limited to those instances that truly concern fraud, else government contractors acting in good faith would be rightly dubious about working with the government.” Well said, Judge Hilton.
The good news is that the contractor was vindicated—subject to an appeal. The bad news is that the contractor had to defend against these meritless claims.
This past summer, the Seventh Circuit court of appeals, in another “implied certification” case, explained:
“we conclude that it would be... unreasonable for us to hold that an institution’s continued compliance with the thousands of pages of federal statutes and regulations incorporated by reference into the Patient Protection Act are conditions of payment for purposes of liability
under the FCA. Although a number of other circuits have adopted this so-called doctrine of implied false certification ...we decline to join them.”
This ruling is good news for government contractors, who are as we know so well, subject to a web of statutory and regulatory requirements in any government procurement. Now, at least in the Seventh Circuit, a contractor’s failure to meet all contractual and regulatory requirements does not
automatically make claims for payment under the related contract “false.” The Procurement Landscape
The implications for national security and the defense industrial base are significant because, as most of you are aware, the federal procurement marketplace is governed by a rules-based system in the Federal Acquisition Regulation and the agency FAR supplements. A contract that is awarded based on fraud can be found to be void from the beginning (void ab initio). Under that scenario, the government can stop making payments even for work already performed. And there may be other collateral
consequences taken as well.
And I have seen a progression in the distrust and the shifting of responsibility and risk that has been layered into the system through these rules. First was the mandate that every company have a written code of conduct that addresses issues relevant to the size and nature of the work of the company. Then the rules imposed a “mandatory disclosure” requirement whereby companies must report to the contracting officer for the contract and the inspector general of the agency any “reasonable basis” to believe that a violation of certain federal laws has occurred.
On top of those rules they’ve added disclosure requirements related to activities implicating violations of trafficking in persons, breach of information assurance on any information technology networks— whether government or contractor—and counterfeit parts. And when it is put into place, I have every expectation that the regulations to implement the July 2014 Executive Order on “Fair Pay and Safe Workplaces” will mandate reporting of violations of 14 federal labor laws and related state laws. For us, it is not a question of whether these requirements are proper; in almost every case we see a legitimate basis for the federal government’s concerns. More often than not, we have concerns with the method of implementation.
While I know that words in the contract matter, it is not too far of a stretch for me to envision the government issuing an interim rule that makes every element of a contract a material term and condition and requiring every contractor to certify that they are in full compliance with every word of the document.
And this is not just a prime contractor responsibility. Every one of these rules has a mandatory flow-down requirement to subcontractors and vendors, including commercial item suppliers.
I’ll save for another day my detailed commentary on these provisions. But they are part and parcel of the landscape governing the government’s approach to contract administration and violations, and to the risk facing contractors who want to do business with the Department of Defense or other federal agencies.
And as I’ve implied throughout, it is too flippant for commentators to say that those companies who want to do business with the federal government should just not commit fraud and should just comply with all of the laws and all of the contract requirements. So much of that foundation is beyond a company’s direct and exclusive control. Some violations are even created by the government. The Future
How can government contractors limit their exposure to False Claims Act lawsuits?
You can regularly perform compliance reviews. The penalties for violating the False Claims Act are severe and justify some “ounce of prevention” action.
Respond to employees’ concerns. While companies strongly encourage employees to report problems, many False Claims Act cases start with whistleblowers who believe that their employer did not take seriously their concerns about potential problems. If an employee raises a question, it should be investigated. The employee who believes that the employer is trying to act responsibly is much less likely to file a lawsuit alleging fraud.
Keep government in the Loop. Regular reports can disprove an allegation that the company was hiding something from the government.
Disclose voluntarily and quickly contract or regulatory irregularities, even before a final legal conclusion about a violation has been reached. Some rules don’t give you much time for that detailed
investigation; some government investigators don’t want you to investigate on your own. But such timely disclosure can protect against some False Claims Act lawsuits. As I’m sure you have seen, often a delay in reporting known problems is interpreted as an attempted “cover up,” which is often perceived as worse than the “crime.”
Finally, follow through. If a problem is discovered, a plan should be put into place to address it. Prompt corrective action may defeat a later accusation of knowingly submitting false claims.
Earlier I said that there are changing circumstances that might affect the future of the False Claims Act use and even abuse. It may change the dynamics for both relators and defendants.
First, while there has been a lot of discussion about the criminal False Claims Act, there are many more civil false claims act cases filed. But the Justice Department’s Civil Division has announced that it is routinely sharing all civil false claims act cases filed under seal with the Department’s Criminal Division for their information and consideration.
Second, on September 9, Deputy Attorney General Sally Yates issued a memo for the United States Attorneys directing them to pursue individual executives of companies, not just the companies, in all corporate misconduct cases—not just for FCA action.
She said, “One of the most effective ways to combat corporate misconduct is by seeking accountability from the individuals who perpetrated the wrongdoing.” She went on to list six steps that Justice
Department officials should take in every investigation of corporate misconduct, from requiring companies to disclose all relevant facts relating to individuals responsible for the conduct to consistently focusing on individuals along with the company in evaluating whether to bring suit— regardless of the individual’s ability to pay.
By the way, we see that same trend of targeting individuals in the agencies’ suspension and debarment activities. While historically the focal point of attention was on the company, in FY 2014, according to the Interagency Suspension and Debarment Committee, total suspensions, debarments and proposed debarments jumped 7.6 percent over 2013, representing the fourth consecutive year that these numbers have increased. Even where a company settles a suspension or debarment action, there has been an increase in the government’s invoking suspension or debarment of individual employees. Finally, since many current and pending regulations will require companies to publicly post in the FAPIIS (Federal Awardee Performance and Integrity Information System) database even allegations of fraud, companies can no longer allow these allegations to sit unchallenged because of the significant collateral implications such reporting will have on its competitive opportunities.
Conclusion
It is regrettable that the federal fraud statistics are growing year over year. It is regrettable that we have to have a program that explores issues relating to False Claims Act litigation and its implications for national security and the defense industrial base. I am confident that the overwhelming number of companies who are PSC member companies want to follow the rules. It is probably a true statement that the overwhelming number of companies that compete for business with the Department of
Defense want to follow the rules. Some are successful. Despite their best efforts, some make mistakes. But our procurement system owes these companies some degree of trust between the parties—not mistrust as I fear exists today. It owes these companies a greater degree of clarity about the
requirements of their contracts and the work that must be done to execute them. And the Congress and the federal courts owe the companies who want to do business in the federal marketplace a far greater degree of certainty and consistency in the interpretation of critical civil and criminal behaviors. At PSC, we intend to continue our advocacy toward those objectives, whether it is on the Hill, in the Executive Branch, or in the courts. If you are not a PSC member company yet, consider joining us. If you care about these issues, regardless of your PSC membership, engage with us in our work. I’ll be happy to talk with any of you about how you can do that.
Thank you for your participation today and your interest in these issues. I look forward to continuing the conversation.
