Any contractor working on a project funded, in whole or in part, by the federal government needs to be aware of the potential liability imposed by the False Claims Act (FCA). First enacted in 1863 to address fraud against the federal government committed by defense contractors during the Civil War, the potential reach of FCA liability was examined and narrowed last year by the U.S. Supreme Court in
Allison Engine Co. v. United States.
Basic Rules Today, the FCA applies to any project using federal funds, whether via a direct government contract or a federal grant to a state or local government or other recipient. Potential FCA liability flows with any payments made from federal funds—from the initial recipient down to the last supplier. Under the law, 3729(a), a person or company violates the FCA if it:
- (a)(1) knowingly presents, or causes to be presented, [to the U.S. government] a false or fraudulent claim for payment or approval;
- (a)(2) knowingly makes, uses, or causes to be made or used, a false record or statement to get a false or fraudulent claim paid or approved by the government; or
- (a)(3) conspires to defraud the government by getting a false or fraudulent claim allowed or paid.
The FCA’s definition of "claim" is extremely important. It includes not only claims presented directly to the government, but also claims presented to recipients of government funds. A claim is defined as any request or demand, whether under a contract or otherwise, for money or property that is made to a contractor (such as government prime contractors), a grantee (such as state or local government recipients of federal funds) or other recipients if the government provides or reimburses any portion of the money or property that is requested or demanded.
"Knowingly" includes actions taken in reckless disregard for the truth, in addition to actions taken in deliberate disregard for the truth. Absent mitigating factors, FCA violators are liable to the government “for a civil penalty of not less than $5,000 and not more than $10,000, plus three times the amount of damages which the government sustains” because of the violation. Prior to
Allison Engine, some courts found a 3729(a)(2) violation occurred any time a false application for payment was made and paid from funds derived from government funds.
Allison Engine
Allison Engine, a former division of General Motors (GM), subcontracted to furnish generator sets for ArleighBurke class-guided missile destroyers being built by two shipyards for the Navy. Allison further subcontracted parts of its work to General Tool Company (GTC) and Southern Ohio Fabricators (SOFCO). After the U.S. Treasury spent billions of dollars on the destroyers, two former employees of GTC brought suit against Allison, GM, GTC and SOFCO under the whistleblower provisions of the FCA.
The plaintiffs alleged in the suit that invoices submitted to the shipyards fraudulently sought payment for work not done by GTC and SOFCO to meet Navy plans and specifications. In a jury trial, the plaintiffs presented evidence of false certifications of workmanship that had been presented to the shipyards with applications for payment. However, no evidence was ever presented to the Navy proving the false certifications. The trial court entered judgment for the defendants, finding no FCA liability can exist without evidence that the false claims actually were presented to the government.
In
United States v. Allison Engine Co., the 6th Circuit Court of Appeals reversed and found actual presentment of a false claim was only required under Section (a)(1). It did not believe presentment was a requirement for proof of an (a)(2) violation for use of a false statement to induce government payment or an (a)(3) violation for conspiracy to defraud the government. In other words, the court took the position that if a false record or statement was used to obtain a payment traceable to government funds, an FCA violation occurred.