• The False Claim Act: The Government’s Sledgehammer Just Got Bigger
  • February 10, 2017 | Author: James R. Harvey
  • Law Firm: Vandeventer Black LLP - Norfolk Office
  • The False Claims Act (FCA) has long been the United States Government most effective tool for dealing with fraud in government contracting, and that tool is now more powerful than ever. Originally enacted during the Civil War to combat war profiteers, it allows the government to seek criminal and civil penalties. As a reward to those who report fraud, it allows relators to recover between 15 and 30% of the amount recovered on behalf of the government, plus their attorney’s fees. A claim subject to the FCA is broadly interpreted to include just about any statement submitted to the government in order to obtain payment. Each false FCA violation is punishable with up to five years in prison, and 10 years if it involves a conspiracy. In addition, each violation is subject to civil penalties of treble damages, plus a fine. In each of the last four years, the Department of Justice recovered more than $3.5 Billion from FCA cases. [1]

    The Government’s recovery under the FCA is sure to rise as this summer, the Department of Justice published an interim rule effective August 1, 2016 nearly doubling the fine applicable for each false statement. [2] This rule adjusts the minimum per-claim penalty from $5,500 to $10,781, and the maximum per-claim penalty from $11,000 to $21,563. Anyone doing business with the Government is likely to make repeated statements to the government subject to the FCA during the course of a contract, making this increase a huge liability exposure for potential violators. While these increased fines may open the door to an argument that they violate the United States Constitution’s Eighth Amendment prohibition on excessive fines, in most situations it will give government investigators and private relators increased leverage in costly settlements discussions and criminal prosecutions.

    This summer, the United States Supreme Court also weighed in on the expansive scope of the False Claims Act. In Universal Health Services, Inc. v. United States, [3] a healthcare provider billed the government through the Medicaid program for providing specific mental health professional services. However, many of the individuals providing these services were not properly licensed. While the healthcare provider did not make an express statement to the government about the licensure of these individuals, the Supreme Court found under the “implied false certification theory” that the bills can be a basis for a violation under the FCA. A violation exists if a “claim” makes a specific representation about the goods or services provided, and the company fails to disclose noncompliance with material statutory, regulatory or contractual requirements. In other words, material omissions or half-truths can trigger FCA liability just as much as an affirmative false statement. Now that the Supreme Court has approved of the “implied false certification theory,” the Government has broadened powers to enforce the FCA in many situations involving government contracting.

    If increased fines and stricter interpretation is not enough to make companies take notice of the FCA, then increased enforcement activities should certainly get their attention. Contractors fraudulently using Disadvantaged Business Enterprise (DBE) programs have been the subject of numerous investigations and settlements over the last year. Contractors have been suspended, debarred, and convicted for using a DBE entity as a pass through scheme to flow money from government contracts to non-DBE entities. Granite Construction, Inc. will pay over $8.25 Million in fines and forfeitures where Granite conspired to make it look like a DBE company was performing work, when it was providing no commercially useful function. [4] Ahern Painting Contractors, Inc. was suspended by the U.S. Department of Transportation for using a DBE to pass through materials from a non-DBE supplier for a bridge maintenance, repair and painting contract in New York. [5] Sound Solutions Windows & Doors LLC was fined $5.8 million under the
    FCA and FCJ Real Estate Development Company was debarred for 3 years for using a pass-through entity “to obtain the appearance of DBE participation” on an FAA funded contract at Chicago’s O’Hare International Airport. [6] Also in Chicago, Elizabeth Perino was convicted in a DBE pass-through fraud scheme where she falsified certain documents to disguise that her company did not meet DBE requirements and conspired to make it appear that it had performed work really performed by the prime contractor. [7] In March, Philadelphia based contractor, Markias, Inc. was suspended for an alleged pass-through conspiracy on two federal funded bridge renovation projects. [8] In July, a DBE owner plead guilty to using her company to obtain kickbacks for herself, while not providing any services on a bridge project. [9] In Idaho, Elaine Martin was recently sentenced to 84 months in prison and her companies debarred for submitting false applications to participate in DBE programs. [10] Finally, The Department of Justice is now suing the CEO and CFO of a company that already paid a $50.6 million fine under the FCA for overbilling services on reconstruction contracts in Afghanistan, Iraq and other countries. [11]

    The False Claims Act is the Government’s most powerful tool used to combat fraud and abuse in contracting with the government. Contractors should beware that increased penalties, broad interpretation by courts and increased investigations have made the FCA even more powerful and a fearsome weapon to combat fraud that must be respected.



    [1] https://www.justice.gov/opa/pr/justice-department-recovers-over-35-billion-false-claims-act-cases-fiscal-year-2015

    [2] Federal Register, Vol. 81, No. 126, 42491, June 30, 2016.

    [3] Universal Health Services, Inc. v. United States, 136 S. Ct. 1989 (2016).

    [4] U.S. Dep’t Labor, Office of Inspector General, OIG Investigations Newsletter, Vol. I, Nov. 30, 2015, p.3.

    [5] https://www.oig.dot.gov/library-item/33605, August 4, 2016.

    [6] https://www.oig.dot.gov/library-item/32938, January 20, 2016.

    [7] https://www.oig.dot.gov/library-item/33485, June 17, 2016.

    [8] https://www.oig.dot.gov/library-item/33162, March 31, 2016.

    [9] https://www.oig.dot.gov/library-item/33516, July 6, 2016.

    [10] https://www.oig.dot.gov/library-item/33626, August 16, 2016 (MarCon, Inc., MarCon Precast, Inc. and Elaine Martin)

    [11] https://justice.gov/opa/pr, July 28, 2016.