The False Claims Act for Construction in a Post Stimulus World

The False Claims Act for Construction in a Post Stimulus World Tamara M. McNulty, Esq. Kathleen O. Barnes, Esq.

Topics for Discussion • Introduction • Elements of a False Claim • Ways in Which a False Claim Can Arise • Recent Amendments to False Claims Act • OK?... or NO WAY! • Conclusion

I. Introduction • False Claims Act (“FCA”) • Primary enforcement tool for combating fraud in alleged false claims made for federal funds • Since amended in 1986, over $30 billion recovered in damages, fines, and penalties • Last 4 years volume of claims up 50% • Predicted that 2012 will result in largest ever recovery numbers

I. Introduction – History of FCA • Enacted in 1863 to address procurement fraud by contractors during the Civil War • Act repeatedly expanded to target every type of fraud against the Government and to anyone who receives government money or property • 1986 expanded power to private attorneys and to protect and incentivize whistleblowers • FCA strengthened in 2008-2010 by following legislation: • 2008 Close the Contactor Loop Hole Act • 2009 Fraud Enforcement & Recovery Act (“FERA”) • Patient Protection & Affordable Care Act (“PPACA”)

II. Elements of a False Claim • FCA definition of a claim: • [A]ny request or demand, whether under a contract or otherwise, for money or property and whether or not the United States has title to the money or property, that: • is presented to an officer, employee, or agent of the United States; or • is made to a contractor, grantee, or other recipient, if the money or property is to be spent or used on the Government’s behalf or to advance a Government program or interest, and if the United States Government • provides or has provided any portion of the money or property requested or demanded; or • will reimburse such contractor, grantee, or other recipient for any portion of the money or property which is requested or demanded… [31 U.S.C. § 3729(b)(2(A)]

II. Elements of a False Claim • What constitutes knowledge under FCA? • Knowledge can mean actual knowledge, deliberate indifference or reckless indifference to the truth or falsity of the claim • Congress did not intend to punish contractors making honest mistakes but they will be held accountable for unreasonable mistakes of contract/statutory interpretation

II. Elements of a False Claim • Contractors bear some responsibility for actions of subcontractors or suppliers pursuing claims through pass through • Contractors must perform good faith review of any subcontractor claims before passing them on to the Government

III. Ways in Which a False Claim Can Arise • Violations spelled out in FCA § 3729(a) • Violations most litigated and applicable to construction industry: • Direct false claims • False statements/records • Reverse false claims • False claims can also arise from failure to deliver money or property to the Government, certifying receipt of government property without actual knowledge of receipt, conspiring with another to commit FCA violations

Ways in Which a False Claim Can Arise Most Litigated Violations Relevant to the Construction Industry • Direct False Claim • Under FCA § 3729(a)(1)(A) if any person “knowingly presents or causes to be presented, a false or fraudulent claim for payment or approval… is liable to the United States Government.”

Ways in Which a False Claim Can AriseMost Litigated Violations Relevant to the Construction Industry • False Statement/Record • Under FCA § 3729(a)(1)(B) a person who “knowingly makes, uses, or causes to be made or used, a false record or statement material to a false or fraudulent claim . . . is liable to the United States Government.” • No requirement that the statement or record be specifically “certified” in order to constitute a false claim • FCA states false statement or record has to be knowingly “made” or “used”

Ways in Which a False Claim Can AriseMost Litigated Violations Relevant to the Construction Industry • Reverse False Claims • If a Contractor “knowingly makes, uses, or causes to be made or used, a false record or statement material to an obligation to pay or transmit money or property to the Government or knowingly conceals or knowingly or improperly avoids or decreases an obligation to pay or transmit money or property to the Government” is considered a false claim

IV. Recent Amendments to the FCA • The Fraud Enforcement and Recovery Act 2009 (FERA) • Provides the “federal government with more tools to investigate and prosecute financial fraud” • Targets all fraudulent activity from mortgage lending to securities fraud • Amends the Major Fraud Act to protect funds under the Troubled Assets Relief Program (TARP) and American Recovery and Reinvestment Act of 2009 (ARRA) • Authorizes funding to hire prosecutors and investigators at DOJ, FBI and other law enforcement agencies • Extends FCA coverage to “correct and clarify” the scope of the FCA and the kinds of claims that may give rise to liability under the FCA

IV. Recent Amendments to the FCA • FERA – Impact on FCA • Removes the Presentment Requirement • A claim need not be directly presented to a United States government officer, employee or member of the armed forces in order to give rise to a false claim • Redefines “claim” –to clarify that Government need not hold title to, or have possession of money or property • If a contractor submits a false claim to another contractor or a recipient of federal funds, it is considered a violation of the FCA

IV. Recent Amendments to the FCA • FERA – Impact on FCA • Removes Requirement for Intent to Get Paid By the Government • Deletes language “to get a false or fraudulent claim paid or approved by the Government” from the FCA – to avoid the limits set by the Supreme Court in Allison Engine Co. v. United States ex. rel. Sanders

IV. Recent Amendments to the FCA • FERA – Impact on FCA • Broadly Defined Materiality Requirement • False statement must be “material” to a false claim • “Material” is “having a natural tendency to influence, or being capable of influencing, the payment or receipt of money or property • Other • FERA extended protection for qui tam relators beyond employees to include Contractors and agents • Expands U.S. Attorney General’s authority to delegate the power to conduct investigations prior to intervening into a relator’s FCA suit

IV. Recent Amendments to the FCA • PPACA – Impact on FCA • Public Disclosure Limitations on Relator-Filed Cases • Amended the language of FCA to provide that “the court shall dismiss an action unless opposed by the Government, if substantially the same allegations or transaction alleged in the action or claim were publicly disclosed.” 31 U.S.C. § 3730(e)(4)(A) • Original Source Requirement • PPACA revised definition of who is an “original source” • “Under PPACA, an original source is now someone who has knowledge that is independent of and materially adds to the publicly disclosed allegations or transactions”31 U.S.C. § 3730 (e)(4)(B)

Test Your Wits… OK? or… NO WAY!

OK? or… NO WAY! • Issue • Whether the Government must be a direct party to the Contract to establish a FCA violation? • Whether use of unauthorized subcontractors constituted breach of Contract or FCA violation?

OK? or… NO WAY! • Facts • Contractor entered into construction contract with Honduran Social Investment Fund (FHIS) to rebuild Honduras after a hurricane • Contract financed by USAID • Contractor permitted the use of Subcontractors following required authorization • Contractor admitted subcontracting work without USAID approval • Government filed suit against Contractor under FCA alleging Contractor falsely certified performance of work that had been completed by unauthorized subcontractors

NO WAY? • United States v. DRC, Inc. • Liability under the FCA does not require a direct contract between the Contractor and the U.S. Government • To prevail, Government must show that Government: • Provided funds to grantee upon presentment of the claim • Provided funds directly to the Contractor after the grantee presented the claim • Government financed the Contract and directly provided funds to Contractor upon receipt of certified invoices

NO WAY? • United States v. DRC, Inc. • To establish implied false certification in violation of the FCA, Government must establish • Contract requirement • Requirement was material • Contractor withheld information about its non-compliance • Contractor withheld information on compliance “knowing” that such information was material to the Government’s decision to pay for the completed work [2012 WL 1379833 (D.D.C 20120]

OK? or… NO WAY! • Issue • What evidence is required to establish a “knowing” submission of false or fraudulent claims?

OK? or… NO WAY! • Facts • Construction Management firm served as general contractor for a series of housing projects funded by Federal Government • Qui Tam relator alleged Contractor used fraudulent billing practices while working on the projects • Relator brought qui tam claims under direct claims portion of FCA § 3729(a)(1) and false records portion of FCA § 3729(a)(2) • Relator provided evidence that HUD officials approved Walsh’s contract with expectation that costs billed as “general conditions” not exceed 6% of total costs

NO WAY? • U.S. ex rel. Hudulla v. Walsh Construction Company • Court applied FCA, pre-2009 amendments • Court held sufficient evidence to find violation of direct claims portion of FCA • Court found that the Government disbursed funds on the projects only after approving budgets, including Walsh costs • Court found that relator had not yet established that Walsh “knowingly” made false or fraudulent claims as a matter of law • Innocent or negligent mistakes not actionable under FCA [834 F. Supp. 2d 816 (N.D. Ill. 2011)]

OK? or… NO WAY! • Issue • What evidence is required to establish a “knowing” submission of false or fraudulent claims?

OK? or… NO WAY! • Facts • Contract with FEMA to lease property to the Government for an RV park for the victims of Hurricane Katrina • Government encountered difficulties preparing the land and decided to exercise its right to terminate the lease after one year • Contractor submitted a claim to the Government for payment for the costs to hydro-seed and replace 150 trees • Contractor made no representation regarding ground cover, but represented the presence of an estimated 150 trees at the time of the lease • Government established that the property contained only 110 trees, many in poor health and that Contractor failed to disclose the lack of grass on the property

OK! • Grand Acadian, Inc. v. United States • Court held that the Government failed to establish the requisite mental state under the FCA • No false claim regarding claim for hydro-seeding because local state law required ground cover on the property • No false claim regarding number of trees to be replaced because Contractor had only estimated the number of trees at the time of lease • No false claim related to the health of the trees as no layperson would know how to evaluate the health of a tree in an early stage of decline [2012 WL 1882831 (Fed. Ct. May 23, 2012)]

OK? or… NO WAY! • Issue • What constitutes timely discovery and return of an overpayment before failure to return constitutes a violation of the FCA?

OK? or… NO WAY! • Facts • Contractor and its purchaser agreed to sell aircraft fighters, services and equipment to a foreign government, which paid for the jets with money borrowed from the United States • After the execution of the contract, the contractor and foreign government agreed in principle to reduce the scope of work, but the reductions remained unpriced • During performance of the project, the contractor performed the reduced scope of work, but continued to receive payment for full performance • The contractor and foreign government did not amend the contract to formalize the reduction of the scope of work until nearly four years later

OK? • U.S. ex rel. Yannacopoulis v. General Dynamics. • Government submitted amicus brief on reverse false claims • DOJ contended that contractor has extra-contractual duty to return overpayment when decision is made to reduce scope of work – even before binding amendment executed to modify the Contract • Court did not comment on DOJ position but upheld grant of summary judgment, finding no evidence of false statement by General Dynamics 652 F.3d 818 (7th Cir. July 26, 2011)

OK? or… NO WAY! • Issue • Whether the Contractor violated the FCA as a result of its subcontractor’s failure to pay prevailing wages? • Whether the Court should defer resolution of a FCA case pending the Agency’s determination regarding the amount of wages paid?

OK? or… NO WAY! • Facts • Contractor with 20 years government contracts experience signed agreement with Army to construct buildings on military base • Contract included determination of hourly wages for electricians, with base hourly rate and fringe benefits • Contractor’s owner and bookkeeper attended a training session on the prevailing wage rate requirement for federal government contracts and acknowledge familiarity with the requirements • Contractor submitted payroll certifications for its employees and separate certified payrolls for its subcontractors, but did not list employees of one subcontractor

OK? or… NO WAY! • Facts • Contractor did not supervise, direct or pay for the work of the Subcontractor • Subcontractor did not submit payroll certifications for 2 years and Contractor had not instituted any procedure to ensure or verify proper submission of certifications • Contractor submitted payroll certifications that did not match contemporaneous records maintained by Subcontractor and contained non-compliant wages

NO WAY! • U.S. ex rel. Brian Wall v. Circle C. Construction, L.L.C., et. al. • Court determined that the Contractor was experienced, and acted in reckless disregard of the truth or falsity of the information provided regarding its subcontractor’s wage payments • Contractor’s wage certifications were expressly false because: • Claimed to be complete when no employees for one subcontractor had been included • Improperly represented that prevailing wages were paid to all subcontractor employees • Court rejected primary jurisdiction argument, finding that the injuries and remedies under the FCA and Davis Bacon Act are separate and distinct • Relators’ allegations of false certification did not necessitate technical, agency specific expertise [2012 U.S. App. Lexis 20433 (6th Cir. 2012)]

OK? or… NO WAY! • Issue • What are the elements for proof of “implied false certification?” • What evidence is required to establish a “knowing” submission of false or fraudulent claims?

OK? or… NO WAY! • Facts • Contractor agreed with U.S. Army to provide logistical services in support of military operations • Contract with Government was an Indefinite Delivery, Indefinite Quantity (IDIQ) contract • After war in Iraq began, Government issued task orders to provide services to deployed troops • Government alleges that in 2003 and 2006, Contractor submitted false claims under task orders in violation of FCA – the work was performed but the expenses were unallowable

NO WAY? • U.S. v. Kellogg Brown & Root Services, Inc. • Court rejected claim that Contractor’s submissions were factually false because the unallowable expenses were for work actually performed • Court wary about blurring the lines between breach of contract and violation of the FCA • Court was more receptive to argument that the submissions were legally false as Government need only show that Contractor withheld information about noncompliance with material contractual requirements • Court denied Contractor’s Motion to Dismiss to allow proof that KBR knew the submissions were false and that compliance with the obligation to ensure expenses were allowable was material to decision to pay [800 F. Supp. 2d 143 (2012)]

OK? or… NO WAY! • Issue • Whether Contractor who failed to bear burden of proof of certified claim may be found liable for submission of a false claim?

OK? or… NO WAY! • Facts • Contractor awarded two contracts to provide materials for rehabilitation of the Iraqi Republic Railway • Contractor completed delivery of less than 10% of value of contract materials, which were partially assembled missing critical parts • Contractor made no further deliveries despite frequent promises to the Government • Government terminated both contracts for convenience after withdrawing a cure notice to permit the Contractor to remedy performance • Contractor submitted certified claim for entire value of Contracts, plus $3 million in lost business

OK? or… NO WAY! • Facts • Certified claim did not include an itemization of claimed costs, but Contractor produced internal spreadsheet in discovery that approximated the total of the certified claim • Contractor testified that spreadsheet was only a “rough estimate” of the amounts in claim • Contractor withdrew the $3 Million lost business claim on the first day of trial

NO WAY! • Railway Logistics International v. United States • Court found no support for certified claim • Internal spreadsheet relied upon by Contractor was “replete with exaggerated or fabricated figures” • Government had limited its claim under the FCA only to those invoices and costs that had been grossly inflated • Once Court determined that a portion of the claim was false, the entire claim was subject to forfeiture 103 Fed. Cl. 252

OK? or… NO WAY! • Issue • Whether an inaccurate estimate of costs on a cost-reimbursable contract constitutes a “knowing” submission of a false claim?

OK? or… NO WAY! • Facts • Contract was cost reimbursable, plus award fee where Contractor was paid actual costs rather than a pre-agreed fixed price • RFP called for a “best value” evaluation • Contractor submitted a bid of $432.7 million in estimated costs and was chosen as the award winner • Contractor’s employees had been directed to reduce the bid estimate without regard to actual costs • Contractor was paid more than $900 million for its work

NO WAY? • Hooper v. Lockheed Martin Corp. • Case of first impression for the Ninth Circuit • Court held that false estimates, including fraudulent underbidding, where bid is not what the Contractor intends to charge, may be a source of liability under the FCA • Court determined that Contractor’s evidence was insufficient to justify the lowering of cost estimates to the levels in the winning bid • Court found triable issue on whether Contractor had actual knowledge, deliberately ignored the truth or acted in reckless disregard of the truth when submitting its bid No. 11-55278 (9th Cir. 2012)

OK? or… NO WAY! • Issue • Whether the Contractor is entitled to payment for work based on an inaccurate estimate of its cost? • Whether the Contractor submitted a false or fraudulent claim for payment?

OK? or… NO WAY! • Facts • DOT’s Maritime Administration (MARAD) awarded an 8(a) sole source IDIQ contract for logistics program support • 8(a) Program places limits on sole source awards (some exceptions) • MARAD awarded Contractor more than $20 million over five-year term of initial contract, far exceeding sole source limit • Contractor submits cost proposal for a new contract, providing an estimated price of $2,999,949.00 over 5 years despite fact that it had been billing over that amount every year under incumbent contract • Contractor proposed to meet estimated amount by phasing out 80% of workforce over course of new contract – unless Government directed otherwise

OK? or… NO WAY! • Facts • Most of the new contract is performed and paid, but MARAD has internal funding allocation problems putting an end to the contract • Contractor continues to perform while not being paid, which results in dispute over non-payment • MARAD takes position that because Contractor had submitted a fraudulent cost proposal, new Contract was “void ab initio”

OK! and NO WAY! • Veridyne Corp. v. U.S. • Court found that the Government was aware at all times that the Contractor’s cost proposal did not reflect actual estimate of costs • Court found no evidence that the Government relied on the cost proposal • Court held Contractor entitled to recover for work invoiced and accepted by the Government • Court went on to hold Contractor liable under the FCA counterclaim and awarded additional damages under the CDA for same acts 2012 U.S. Claims LEXIS 754

VI. Conclusion • Government increasingly aggressive about contractor fraud • Congress has taken multiple measures to strengthen FCA • DOJ more aggressive in pursuing enforcement and what constitutes a false claim under FCA • Contractors pursuing U.S. Government projects must be extremely diligent in making claims, documenting claims and monitoring payments

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The False Claims Act for Construction in a Post Stimulus World