OVER THE PAST year, Surety Bond Quarterly has featured a series of articles devoted to select areas of federal contract compliance that are often overlooked by contractors but that are of the utmost importance to surety professionals and their contractors. Through this federal government contract compliance series, readers were first introduced to wage rate requirements under the Davis Bacon Act and made aware of their need to observe certain limitations on subcontracting. Next a feature article provided an in-depth look at the federal government’s policies for combating human trafficking and the costly consequences for those contractors that have failed to comply with those requirements. The series then turned to the complicated world of small business subcontracting, with a particular emphasis on the Department of Transportation’s Disadvantaged Business Enterprise program. Finally, readers were educated on the affirmative action policies enforced by the U.S. Department of Labor’s Office of Federal Contract Compliance.
As these compliance requirements have grown more intricate, so too have the tools used by the federal government to enforce them. Federal agencies have a wide array of enforcement methods, such as suspension and debarment, termination for default, and monetary claims against contractors. However, one enforcement tool in particular looms over all others, both for its unpredictability and for the ruinous consequences it can inflict on contractors – the False Claims Act. This article concludes the federal government contract compliance series with a discussion of the dangerous pitfalls of the False Claims Act, the significant risks associated with violating the Act, and conclusions for contractors seeking to avoid liability.
A. The False Claims Act: Defrauding the government is different – and easier – than you think
Contractors are universally aware that defrauding the government, just as defrauding any other customer, is strictly prohibited and that contractors can incur significant liability. However, many contractors would be surprised to learn that this prohibition reaches beyond typical types of contract fraud, such as submitting false invoices for work that was never performed or that overstate costs or labor rates to inflate the final bill. Under an evolving doctrine known as “false certification doctrine,” a contractor that falsely certifies that it has complied with any of the myriad compliance policies imposed by the government, such as subcontracting goals or human trafficking policies, may be liable under the False Claims Act.
The False Claims Act is distinct from traditional fraud in important other ways as well. Unlike private customers alleging fraud, the government is not required to prove that it has suffered any damages in order to bring a false claims suit – all that is required is that the contractor have submitted a claim it “knew” was false. And this knowledge requirement is less of a defense than it seems at first blush, as a contractor that is merely reckless in disregarding whether the claim was true or false is deemed to “know” of its falsity under the Act. Taking all of this together, violating the False Claims Act is strikingly simple; and contractors with weak or non-existent compliance systems are at risk of inadvertently committing multiple violations.
B. False claims violations are costly and unpredictable
When a contractor violates the False Claims Act, it may be subject to two different types of liability – actual damages that are any out-of-pocket loss suffered by the government and statutory penalties that are also sometimes referred to as fines or statutory damages. These penalties are prescribed by law between $10,781 and $21,563 and are assessed for each “claim” submitted to the government. Individual invoices are often treated as separate “claims” when calculating these fines, leading to large penalties even when the government suffers no actual harm.
In addition to being costly, allegations of violations of the False Claims Act can also surprise contractors that are unaware of their risks. Contractors without a direct relationship to the federal government, such as subcontractors or contractors performing federally funded state contracts, are subject to liability as much as federal prime contractors. And under the Act’s whistleblower provisions, individuals may bring suit on behalf of the government based on their own knowledge, catching contractors flat-footed in the absence of any government investigations. Two recent examples illustrate these risks.
In August 2011, Minnesota Transit Constructors, Inc. and a group of subcontractors agreed to pay $4.6 million to settle a False Claims Act suit related to the construction of a federally funded light rail system. None of the defendants held a federal contract. Despite this, the federal funds used to help fund the contract implicated the False Claims Act. When the government alleged that the contractors had falsely certified their compliance with requirements to used Disadvantaged Business Enterprises, they had little choice but to settle.
More recently, in January 2015, a Wisconsin architecture and construction firm, Novum Structures, LLC, agreed to pay $3 million to settle allegations of fraud and false claims relating to construction contracts it had performed. Specifically, the government alleged that the contractor incorporated foreign construction materials into its projects in violation of domestic preference requirements included in its contracts. The government did not allege any defects in the work performed by the contractor – the mere fact that it had falsely certified compliance was enough.
The risk of inadvertent violation has only increased since. Last summer, in a case titled United Health Services v. United States ex rel. Escobar, the United States Supreme Court ruled that, in certain circumstances, a contractor need not expressly certify compliance with contractual provisions in order to have submitted a false claim. Instead, a contractor may be deemed to have submitted an “implied” false certification when it misleads the government through half-truths or omissions. This further presents unique risk to contractors in the construction industry, where tight deadlines, unexpected roadblocks, and available supplies often necessitate changes that are not always communicated to the government in a timely manner.
C. Conclusions for sureties and their contractors
Even as avoiding the False Claims Act becomes more and more difficult, the consequences for violating it have become increasingly severe. Nevertheless, contractors can take certain steps to minimize their risks, such as:
• Implementation of a comprehensive compliance program, including monitoring and training of employees, for compliance with all significant contractual requirements;
• Independent final review of all invoices by a project manager or employee with similarly extensive knowledge of the project to flag non-compliance issues; and
• Regular communication to the government, as advised by counsel, of difficulties in contract performance as well as contract compliance.
In addition to implementing these policies and procedures, contractors should regularly consult with outside counsel regarding changes to the regulatory environment and to obtain timely review of any possible violations. By pro-actively promoting the rigorous compliance policies outlined over the course of this series, surety professionals and their contractors can limit their exposure to liability under the False Claims Act.
W. Barron A. Avery is the chair of Government Contracts practice at Baker & Hostetler, LLP, where he specializes in federal government contract law, including bid protests, claims litigation, regulatory compliance counseling, and investigative matters. Avery also serves on the NASBP Attorney Advisory Council. Avery can be reached at [email protected] or 202.861.1705. William B. O’Reilly is an associate with Baker & Hostetler’s Government Contracts practice. O’Reilly can be reached at [email protected] or 202.861.1745. O’Reilly is practicing in Washington, DC, under the supervision of Avery pursuant to Rule 49(c)(8) of the Rules of the District of Columbia Court of Appeals.