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Federal False Claims Act “Corrected and Clarified” to Expand Contractor Liability

By Michael A. Branca and William W. Thompson Jr.

In its decision in Allison Engine Co. v. United States,[1] the U.S Supreme Court limited—but did not eliminate—the circumstances in which a contractor or subcontractor on a federally funded project may be liable under the federal False Claims Act. Generally speaking, the False Claims Act is violated when (1) a contractor knowingly presents a false claim to the federal government for payment or approval, or (2) knowingly makes a false record or statement to get a false or fraudulent claim paid by the government.[2] Now, Congress has passed and President Obama has signed a new law that overrules Allison Engine and rewrites important sections of the False Claims Act.

On May 20, 2009, President Obama signed the Fraud Enforcement and Recovery Act of 2009 (FERA).[3] Embedded in FERA are amendments to the False Claims Act that significantly expand the circumstances in which contractors and subcontractors may be liable for false claims. Because Congress believed that decisions like Allison Engine were not only erroneous but also greatly weakened the effectiveness of the False Claims Act, it used FERA as a vehicle to correct and clarify the False Claims Act.[4] Below is a discussion of how FERA most significantly affects contractor and subcontractor liability:

Extension of the Act’s Coverage
FERA extends the False Claims Act to claims (including progress payments) under any contract or grant funded or partially funded by the federal government, whether or not the government directly approves the claims. This provision effectively overturns Allison Engine by not requiring direct presentment to the federal government for liability to arise. Instead, a contractor may be liable even if it submits a claim to a third-party recipient of government money or property such as a state agency or grantee. Congress noted that removing the presentment requirement makes the False Claims Act internally consistent, because it defines “claim” to include any payment request for which the government provides all or part of the amount requested or will reimburse a third party for any amount paid.[5]

It is important to note that FERA does not set any minimum amount of federal funding for the False Claims Act to apply. To the contrary, the new law states that the act applies whenever the government provides “any portion” of the money or property for which a claim has been made.

The elimination of the presentment requirement will have broad application to contracts and grants that are funded in whole or in part by the American Recovery and Reinvestment Act of 2009 (popularly known as the “Stimulus Act”). In enacting FERA, Congress was specifically concerned that the more than $1 trillion that has been appropriated to stimulate our economic system would be “dispensed through contracts with non-governmental entities, going to general contractors and subcontractors working for the Government. Protecting these funds from fraud and abuse must be among our highest priorities as we move forward with these necessary actions.”[6] Stimulus Act-funded contracts had already been targeted for special ethics oversight. Now contractors will face the additional risk associated with potential False Claims Act liability for ethics lapses.

Elimination of the Intent Requirement
FERA replaces the False Claims Act requirement that the contractor intended to defraud the government with the requirement that the contractor’s false claim was simply “material” to the decision to pay the claim. This provision of FERA also addresses Allison Engine’s ruling that an intent to defraud the government was necessary for liability under the second basis for false claims liability, that is, the use of a false record or statement to get a false claim paid. According to the Supreme Court’s holding in Allison Engine, a contractor’s false record or statement had to have been intended to defraud the government. Under the False Claims Act, as amended by FERA, a contractor’s false record or statement must simply be “material” to the decision to pay the claim.[7] This means the false record or statement must “have a natural tendency to influence” or be “capable of influencing” the payment decision. Intent has thus been effectively eliminated from the False Claims Act.[8]

Liability for Failure to Return Overpayments
FERA exposes contractors to False Claims Act liability if they knowingly fail to return overpayments to the government, even if no false claim or statement has been made. Before this provision was enacted, contractors were liable if they used false records or statements to conceal, avoid, or decrease obligations to pay the government,[9] known as making “reverse” false claims. FERA imposes liability if a contractor simply conceals, avoids, or decreases its obligation to pay, regardless of whether a claim has been submitted. FERA defines “obligation” specifically to include the retention of an overpayment. Even if a contractor is the innocent recipient of an overpayment, the amount of the overpayment must be returned to the government or the contractor risks liability under the False Claims Act. It should also be noted that, under a provision of the Federal Acquisition Regulation enacted in November 2008, contractors may be suspended or debarred for failing to disclose significant overpayments on government contracts.

The Bottom Line
The amendments to the False Claims Act brought about by FERA demonstrate that the movement toward stricter federal ethics requirements has gained even more momentum. With FERA’s reworking of False Claims Act provisions, contractors and subcontractors assume an even greater risk of liability, and the importance of a robust and effective compliance program is further magnified.

Michael A. Branca and William W. Thompson Jr. are partners in the Washington, D.C., office of Peckar and Abramson.

This article appears in the Summer 2009 issue of Construct!, the newsletter of the Construction Litigation Committee.


End Notes

  1. 128 S. Ct. 2123 (2008).
  2. 31 U.S.C. § 3729(a)(1) and (a)(2).
  3. Fraud Enforcement and Recovery Act of 2009, Pub. L. No. 111-21 (2009).
  4. S. Rep. No. 111-10 (2009). The primary purpose of FERA, however, is to increase accountability for corporate and mortgage fraud. Id.
  5. 31 U.S.C. § 3729(c) (2000).
  6. S. Rep. No. 111-10, at 10 (2009).
  7. Congress eliminated the words “to get,” which were interpreted by the Allison Engine Court as connoting an intent that the false record or statement would lead to payment of a false claim. FERA substituted the words “material to” for the “to get” language.
  8. FERA also eliminates the intent requirement for conspiring to submit a false claim. 31 U.S.C. § 3729(a)(3).
  9. 31 U.S.C. § 3729(a)(7) (2000).


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