The False Claims Act

By Joseph Dirik

If you submit a claim or request that is not based on a good-faith contract basis, the claim may be false or fraudulent.

Dirik is a member of the litigation and construction law practice groups at the Dallas office of Fulbright & Jaworski LLP. Contact him at jdirik@fulbright.com.

Working on construction projects for the federal government can be rewarding. Before practicing law, I had the opportunity to manage projects involving U.S. embassy buildings, military bases and Voice of America broadcast facilities. An important part of contracting with the government has always been the False Claims Act. The FCA is a Civil War-era law passed to punish fraudulent government sales. Times changed, however, when Congress passed the False Claims Amendment Act of 1986. The 1986 overhaul increased penalties, reduced the “knowledge’’ requirements to support fraudulent action, and expanded the ability of private citizens known as “whistleblowers,’’ to initiate false claim or so called “qui tam’’ actions.

The FCA is rather complicated, but we can summarize a general contractor’s liability as follows. First, a contractor’s potential liability starts with a claim. Claims can include requests for equitable adjustment, progress or final payment, claims and virtually any other request for payment.

Second, the claim must be false. Unfortunately, the Act does not define false or falsity. An example of a false claim would be invoicing for 100 yds of concrete but only delivering 50. Other contractor actions can constitute a false claim. A request for payment can be false if the contractor makes false certifications of compliance with disadvantaged business enterprises or Davis-Bacon Act requirements, or requests payment for work that does not satisfy the contract requirements.

An area of increasing concern involves requests for change orders or equitable adjustments. How many contractors routinely inflate a change order request because they expect to negotiate a lower number? Requests are false if they make factual misrepresentations. Always keep one thing in mind: If you submit a claim or request that is not based on a good-faith contract basis, the claim may be false or fraudulent.

Third, FCA liability results if the contractor had actual knowledge of the falsity of the information furnished to the government, acted in deliberate ignorance of the truth or falsity of the information, or acted in reckless disregard of the truth or falsity of the information. The important point to take from this is that actual knowledge or specific intent to defraud is not the standard. I believe the vast majority of contractors do not submit requests for payment with the intent to defraud. But how many contractors fail to adequately investigate or evaluate change order requests to understand their entitlement under the contract or the manner in which the claim amount was calculated?

Fourth, the FCA imposes liability only when a contractor’s alleged misconduct materially impacts the government’s decision to pay the claim. What is still not universally clear is what type of evidence is necessary to satisfy this implied requirement of the FCA.

The fifth and final component involves a technical element requiring presentment of the claim to the government. Claims made under contracts directly with the federal government easily satisfy the presentment requirement. Courts around the country are split, however, on whether a claim made to a customer other than the federal government satisfies the presentment requirement. Some courts have found that a claim submitted under a state agency contract that includes federal funds satisfies the presentment requirement. At the time I wrote this article, the United States Supreme Court was deciding a case that should answer the following question: Is the FCA presentment requirement satisfied if a subcontractor submits a false claim to the general contractor, who in turn presents it to the government?

Two recent cases decided by the Court of Federal Claims highlight contractors’ liabilities under the FCA. In Daewoo Engineering and Construction Co. vs. United States, Daewoo filed a lawsuit to pursue its $64 million claim. But the government instead won its $50 million fraud counterclaim against Daewoo. As many of our readers know, federal contractors must certify the accuracy of most claims. After Daewoo certified its $64 million claim, it hired an expert who used a different methodology to price the claim at $43 million. The court found that Daewoo certified the inflated claim as a negotiating ploy and that the FCA made such “horse trading’’ conduct illegal. This case teaches us that contractors should carefully evaluate the methodology or basis for any change order or claim.

The second case, Morse Diesel International Inc. (d/b/a/ AMEC Construction Management Inc.) vs. United States, involved a contractor’s request for payment of bond premiums under a lump-sum competitively bid job. AMEC forfeited more than $53 million in remaining contract proceeds because an employee asked for and received a false bond premium invoice from its bond broker that was requested to support an entry on a change order proposal. In addition to the obvious fraud involved, this case teaches us that an FCA penalty can be much greater than the amount of the false claim itself.

Editor’s note: The information in this article is not intended as legal advice but to provide a general understanding of the law.

Joseph Dirik, Esq., a member of the litigation and construction law practice groups at the Dallas office of Fulbright & Jaworski LLP.)