• Supreme Court Hears Argument in Case that Tests Reach of False Claims Act
  • April 4, 2008
  • Law Firm: Waller Lansden Dortch & Davis, LLP - Nashville Office
  • On Feb. 26, 2008, the United States Supreme Court heard oral argument in Allison Engine Co. v. United States ex rel. Sanders, a case that may determine the breadth of the False Claims Act (FCA), a federal anti-fraud statute that allows individuals to sue on behalf of the federal government. The question presented in Allison Engine is whether the FCA applies to false claims submitted to a third party that pays the claim with federal funds, even though the false claim was not submitted directly to the federal government. Given that the federal government provides funds to numerous private entities as well as state and local governments, the Court's ultimate decision could have far-reaching impact, particularly in the healthcare industry.

    The Allison Engine case involved claims submitted not to the federal government, but to a private contractor. The U.S. Navy had contracted with two shipyards to build destroyers. The shipyards, in turn, contracted with various subcontractors to assist in building the destroyers. Allison Engine Co. was hired to build the generator sets that supplied electricity to the ships. Allison, in turn, outsourced some work to subcontractors. Former employees of one subcontractor believed the generator sets to be defective and filed suit against Allison and the subcontractors under the FCA on behalf of the federal government, arguing that the companies knowingly submitted bills to the contractor for defective generator sets. The district court dismissed the case because the alleged false claims were submitted to the contractor, not the federal government.

    The district court based much of its decision on an earlier decision from the D.C. Circuit Court of Appeals, United States ex rel. Totten v. Bombardier Corp., which determined that only claims presented to the federal government, and not to entities which receive federal funds, are actionable under the FCA. The Sixth Circuit reversed the district court's decision and took issue with Totten, finding that while one section of the FCA, 31 U.S.C. ยง 3729(a)(1), explicitly requires that claims are presented to the federal government, subsections (a)(2) and (a)(3) simply require that the defendant knowingly submitted a false claim that was paid with government funds. The Sixth Circuit concluded "[t]here is no indication that a claim must be presented to the government in order to be actionable; the statute covers false claims made to parties other than the government so long as the claim will be paid with government funds."

    During oral argument before the Supreme Court, the defendant argued that the Court should follow Totten and require the claim to be presented to the federal government in order to trigger FCA liability. Responding to Justice Breyer's statement that the requirement that the claim be "paid by the government" could mean that there must be a "causal connection" between the claim and the federal government, the defendant argued that "[g]iven the tens of thousands of government contracts, government funds, government financing of States, localities, universities, and so forth, there is no limiting point," if liability arises for any claim paid in part with federal funds, even if the claim was not presented to the federal government. Justice Souter disagreed and explained that there is such a limit--the FCA only covers claims against federal funds which were made for particular contracts, not claims that are paid from general federal grants unconnected to a particular contract or project.

    The United States argued that FCA liability should arise when the federal government receives less than what it was supposed to get for the funds it has provided. Justice Roberts pointed out that this standard could potentially reach any person, explaining that a chemical company that fraudulently increases its prices could be liable under the FCA if a painter, hired by a state to paint a school using federal funds, purchases paint from the chemical company and requests reimbursement from the school for the price of the paint. The government admitted that it sought just such a broad standard. Justices Breyer and Ginsburg both expressed skepticism over the government's standard, claiming it was vastly overbroad because federal funding is so pervasive. The government explained that its theory was limited by two principles. First, "the bill must be submitted to a contractor or grantee in his capacity as such," and second, "the fraud has to be of a nature that if successfully carried to completion could be expected to injure the Federal Government."

    In a surprising development, the former subcontractor employees who brought the case argued for the first time that, in fact, the alleged false claims were presented to the government. They argued that Allison was required to complete certificates of conformance and submit them to the Navy, and that these certificates constituted false claims. Chief Justice Roberts summed up the situation: "So if in fact, as you suggest, Allison submitted the certificate to the navy person at the shipyard, then the question presented in this case is not in fact presented here? Because the question presented assumes that there had not been a submission to the Federal Government of the false - false claim."

    Given this new factual development, it is unclear if the Supreme Court will decide the case on the merits. If it does, however, Justices Breyer, Kennedy, Souter and Ginsburg appear to side with the Sixth Circuit and may find that liability arises even if a false claim is not presented directly to the government. Justices Breyer, Souter and Ginsburg, however, all expressed the need to impose some limits, given the pervasiveness of federal funding. The key limiting factor would appear to be the type and purpose of the federal funding, rather than how or to whom the false claim was submitted. Chief Justice Roberts and Justice Scalia, in contrast, appear to follow the D.C. Circuit in Totten and believe that the claim must be presented to the federal government in order for FCA liability to arise. Chief Justice Roberts' view is not surprising given that he authored Totten. Justice Thomas did not ask any questions, and Justice Alito asked few, making it difficult to know how they view the issue.

    While the Court's opinion is eagerly awaited, it is unclear what its effect will be. There are pending bills in both the Senate and the House to amend the FCA to explicitly reverse Totten and clarify that presentment of a false claim to the federal government is not required.