Cheating the federal government has long been an unpardonable sin. During the Civil War, amidst reports that Union soldiers were opening crates of rifles to find only sawdust, Congress passed the False Claims Act (FCA) in an effort to reduce rampant war profiteering. Over the years, with the expansion of the federal government, the FCA has been called upon to reach far beyond war profiteering and has extended to all sectors of the economy where federal dollars are spent. More recently, Congress has extended the FCA's scope in a monumental and unsound manner – it now includes liability for fraud against entities other than the United States.
The FCA, 31 U.S.C. §§ 3729 et seq., imposes liability for seven separate types of conduct, including submitting a false or fraudulent claim for payment, using a false record or statement that is material to a false or fraudulent claim and avoiding an obligation to the United States. The Act provides for treble damages plus statutory penalties. It also contains a whistleblower provision permitting a private citizen to sue in the name of the United States and to receive a bounty of as much as 30 percent of any recovery.
In response to political concerns that the FCA needed to be strengthened in the wake of substantial government intervention in the economy, Congress enacted the Fraud Enforcement and Recovery Act (FERA) in 2009. Even before FERA, the FCA already had a broad reach. But it had an important limitation: The conduct had to have a direct nexus to the United States government. FERA removed that key safeguard. Pre-FERA, to be liable for submitting a false or fraudulent claim, a defendant had to: (1) knowingly, (2) present or cause to be presented, (3) to an officer or employee of the United States, (4) a false or fraudulent claim for payment or approval. Under this old version of the law, FCA cases had been successfully brought against government contractors, health providers and insurers involved in federal health programs such as Medicare, banks that issued federally insured loans, universities that received federal funding, and many other types of entities – provided they presented or caused to be presented a false or fraudulent claim to the United States. This "presentment" requirement was emphasized in United States ex rel. Totten v. Bombardier Corp., when the D.C. Circuit concluded that a manufacturer of toilets could not be held liable under the FCA for submitting false claims to Amtrak because the FCA required that the claims be presented to a government agency, which Amtrak was not.
Similarly, under the pre-FERA law, liability for using a false record or statement existed only if the statement or record was used to get a false or fraudulent claim paid by the government, but not if it was used to get a claim paid by any other entity (even if that entity received federal funding). As the Supreme Court noted, without this limitation the FCA would be "almost boundless: for example liability could attach for any false claim made to any college or university, so long as the institution has received some federal grants – as most of them do." [Allison Engine Co. v. United States ex rel. Sanders, 553 U.S. 662, 669 (2008) (quoting Totten, 380 F.3d at 496).] Thus, the Supreme Court in Allison Engine held that a subcontractor could not be held liable under the FCA for using a false record or statement unless it intended to defraud the government, rather than the prime contractor.
All of this changed with FERA. In connection with liability for submitting a false or fraudulent claim, FERA removed the requirement that the claim had to be presented to an officer or employee of the United States. Now, liability exists whenever a false or fraudulent claim is submitted to either the United States or to any other entity that receives federal funding that is used "on the Government's behalf or to advance a Government program or interest." FERA also removed the requirement that liability for using a false record or statement could attach only if the record or statement was used to get a claim paid by the United States. During oral argument in the Allison Engine case, Chief Justice Roberts posed a hypothetical to demonstrate the practical impacts of removing this requirement from the FCA: the federal government gives money to a state to build a school; the state hires a general contractor; the contractor hires a painter; the painter buys paint from a paint company; and the paint company buys chemicals from a chemical company to make the paint. Because federal dollars are directly or indirectly used to pay for all of this, each of these entities potentially would be liable under the FCA for their fraudulent conduct, even if they intended to defraud only the next entity in the chain but had no intention of defrauding the United States. FERA makes this hypothetical a reality.
In effect, this means that companies in many important sectors of the economy are subject to the FCA because, as Justice Breyer noted during the Allison Engine oral argument, "government money today is in everything." The federal government is not only paying for two wars, but it has also bailed out Wall Street and the automotive industry, taken over the student loan market, waded into the housing crisis, passed major health reform and spent hundreds of billions of dollars in an attempt to stimulate the economy. Companies that directly or indirectly receive federal dollars through these or other federal programs are potentially liable under the FCA – even if they do not deal directly with the federal government and even if they never intended to defraud the United States.
Exactly how far courts will allow the FCA to reach is unclear. But it is certain that many entities that have never before been targets of an FCA action will be pulled into the Act's orbit by enterprising prosecutors and whistleblowers. Therefore, a heightened awareness of the influence of federal funds in today's economy is crucial to a company's assessment of its potential liability.
This article appeared in the November 25, 2010 edition of Inside Counsel.