By Dave Nadler, Partner, and Ryan P. McGovern, Associate, Dickstein Shapiro LLP
1. FCA Overview
Congress originally enacted the FCA in 1863 to combat fraud perpetrated against the government by Civil War contractors. Congress significantly expanded the FCA in 1986 and 2009 "to reach all fraudulent attempts to cause the Government to pay out sums of money or to deliver property or services." Today, the FCA penalizes anyone who "knowingly presents or causes to be presented, a false or fraudulent claim for payment or approval" or "knowingly makes, uses, or causes to be made or used, a false record or statement material to a false or fraudulent claim . . ." to facilitate payment by the government. Since 1987, the government's FCA recoveries have exceeded $30 billion. The government achieved record FCA recoveries in 2012, including a single-year record of $4.9 billion in civil recoveries, $3 billion of which was for health care fraud.
2. Qui Tam Suits
Private citizens can bring qui tam,or whistleblower, actions based on FCA violations. The plaintiff, or relator, will receive 25 to 30 percent of any damages recovered from the defendant. But, if the government exercises its right to intervene within 60 days of the filing of the suit, the relator's share is reduced to 15 to 25 percent. Although qui tam actions once comprised only a small fraction of FCA suits (30 of 373 FCA suits in 1987) the 1986 amendments greatly expanded the role of whistleblowers and qui tam actions now represent the largest source of FCA suits (647 of 782 suits in 2012).
3. Agency Referrals
FCA cases can also originate from agency referrals to the Department of Justice. For example, cases may be initiated by referral from the Defense Contract Audit Agency (DCAA). DCAA auditors performing routine audits are instructed to "think fraud" and to apply any of the more than 130 "fraud indicators" in their guidance documents. Most of these indicators, however, are undefined or described in only vague generalities, leaving much to the auditor's discretion and increasing the risk that an unintentional oversight may be treated as fraud. Nonetheless, the presence of any fraud indicator can lead to a fraud referral and ultimately an FCA suit against the company.
4. Contractor Disclosures
A contractor's own disclosure can also trigger an FCA suit. Under the Mandatory Disclosure Rule (MDR), enacted in 2008, contractors are required to "timely" disclose to the government "credible evidence" of an FCA violation. These disclosures typically reach a large group of stakeholders within the government, including the Department of Justice, which can initiate an FCA case based on the information provided by the contractor. The MDR, however, fails to define "timely" or "credible evidence" and often leaves contractors guessing about the circumstances that may require disclosure. The regulations, thus, put the contractor in the untenable position of potentially disclosing information prematurely that may trigger an FCA suit, or risk being suspended or debarred from contracting with the government, which is the sanction for a knowing failure to disclose.
5. Recent Amendments
The 2009 Fraud Enforcement Recovery Act (FERA) amendments substantially expanded the scope of potential liability under the FCA. One significant change is the elimination of the "presentment" requirement. Prior to FERA, a false claim was required to be presented directly to an officer or employee of the government, but now liability extends to any direct or indirect claim, such as subcontractors, where the receipt of government funds are involved. FERA also modified the intent requirement of the FCA and now expressly requires that a false statement be "material to" the false claim. Under the liberal definition of "material," however, a falsity can be material even if it had no impact on the government's payment decision. Finally, under FERA contractors can be now be liable for "reverse false claims" when they knowingly retain an overpayment by the government, even if the overpayment was not caused by any action of the contractors.
6. Expanded Liability Theories
Recent FCA cases have also seen expanded contractor liability theories. Under the "implied certification" theory a contractor can be liable for submitting a false claim when it fails to comply with all prerequisites for payment, even where the contract does not contain a requirement for certification with the underlying law or regulation. This could result in significant liability for failure to comply with virtually any of the hundreds of terms that are in a government contract, regardless of whether they are material or a condition of payment. Courts have also expanded FCA liability to include estimates, as opposed to objective statements of fact, even when labeled as such and not certified.
Violators of the FCA are subject to treble damages plus civil penalties of $5,500 to $11,000 per claim. However, the government is trying to redefine the measure of damages under a "fraud in the inducement" theory, which claims that the government would not have entered into the contract in the first place had they known of the contractor's fraud. Under this theory, the government asserts that treble damages should apply to the entire amount of any monies paid under the contract, regardless of the value the government received. Most cases have rejected this theory and adopted a "net trebling" approach to calculating damages, which subtracts the value received by the government from the damages before trebling. Nevertheless, it is reasonable to expect that the government will continue to push this very aggressive approach to damages which, if successful, could cripple or destroy a company.
8. Statute of Limitation Issues
FCA actions must be brought within six years after the date of the violation or three years after the date when the facts are known or reasonably should have been known by the government official charged with responsibility to act (whichever is later), but in no event more than 10 years after the violation. Recent cases, however, have expanded the statute of limitations for FCA cases, holding that the Wartime Suspension of Limitations Act (WSLA) tolls the period for any actions involving fraud during a period of conflict, even if there has not been a formal declaration of war and even if the contract at issue is not in support of a war effort.
9. Expanded Plaintiff Pool
Almost anyone can bring a qui tam action, and while most relators are former company employees, recent cases have allowed government employees to serve as relators, even when they learn of the factual predicate for their claims in the course of performing their jobs. Aside from increasing the pool of relators that can bring these cases, this raises significant conflict of interest concerns and may chill the exchange of information between the government and contractors, who are often required to disclosure very sensitive information in the course of government audits or as a result of the mandatory disclosure regulations.
10. Potential Defenses
The FERA amendments and recent cases have reduced the availability of several key FCA defenses. As discussed above, applying the WSLA to FCA suits significantly reduces the availability of statute of limitations as a defense. The public disclosure bar, which generally prohibits FCA cases if the allegations are based on information that was previously publicly disclosed, unless the relator is the original source of the information, was recently lowered. The Department of Justice now has the unilateral authority to veto the dismissal of a case on public disclosure grounds. Other key defenses remain largely unchanged. For instance, the heightened pleading standards of Federal Rules of Civil Procedure 9(b) require that fraud allegations be stated with particularity. Also, the first-to-file rule provides a defense to subsequently filed FCA suits if they are based on the substantially similar facts as the first case. Under the rule, no person, other than the government, can intervene or bring a related action based on the facts underlying a pending action. Given the increasing number of FCA suits and the expanded reach of the FCA, companies should pay close attention to these developments and maintain strong internal compliance programs to identify and resolve potential problems before they lead to protracted litigation, substantial damages, and reputational harm.