On June 9 the United States Supreme Court dealt a blow to the U.S. government, and those suing on its behalf, in Allison Engine Co. v. United States ex rel. Sanders, 553 U.S. ___ (June 9, 2008), a case under the False Claims Act. The Court rejected an expansive interpretation of the statute that would have extended liability to almost any company in any industry. But the decision was not a complete victory for business. For the first time, the Supreme Court held that the FCA applies to subcontractors on government projects, a group that until now had escaped liability.
The FCA was enacted to combat fraud against the federal government. Until recently, relators -- whistleblowers suing on behalf of the government -- usually sued under subsection (1) of the statute, which imposes liability on any person who knowingly "presents, or causes to be presented" a false or fraudulent claim to the United States. But in recent years, many relators have attempted to broaden the reach of the act by bringing their claims under subsection (2), which imposes liability on any person who knowingly uses a "false record or statement to get a false or fraudulent claim paid or approved by the Government."
Relators have also used subsection (3), which imposes liability on any person who "conspires to defraud the Government by getting a false or fraudulent claim allowed or paid." Relators argue that under these two provisions a defendant is liable for false claims made to a private entity, as long as the entity used government funds to pay the claim. Under this interpretation, many unsuspecting companies who have never done business with the federal government would be subject to the FCA. For example, the statute would apply to a vendor who submits a false invoice to a university, because almost all universities receive federal funding.
Until now, the lower courts disagreed over how to interpret subsections (2) and (3). In Allison Engine the 6th U.S. Circuit Court of Appeals agreed with the relator that the act applies to any defendant whose invoice was paid using federal funds. But in United States ex rel. Totten v. Bombardier Corp., 380 F.3d 488 (D.C. Cir. 2004) the U.S. Court of Appeals for the D.C. Circuit rejected this interpretation, concluding that it "would make the potential reach of the Act almost boundless." Instead, the court held that the act applies only if the defendant's false claim was "presented" to the government. The Supreme Court granted review in Allison Engine to settle this disagreement between the circuits.
On June 9 a unanimous Supreme Court rejected the 6th Circuit's interpretation of the FCA. The Court emphasized that under subsection (2) a defendant must make a false statement "to get" a false claim "paid or approved by the Government." This means that a defendant must make a false statement for the purpose of causing the government to pay a false claim. A defendant is not liable when a private entity pays his claim using government funds. As the Court explained, "[G]etting a false or fraudulent claim 'paid ... by the Government' is not the same as getting a false or fraudulent claim paid using 'Government funds.'" Under subsection (2), "a defendant must intend that the Government itself pay the claim." The Court adopted a similar interpretation for subsection (3), ruling that under this provision, a relator must prove that "the conspirators intended 'to defraud the Government.'"
But the Court also rejected the argument that the FCA applies only when the defendant's false claim has been "presented" to the government. While subsection (1) expressly requires that the defendant cause a false claim be "presented" to the government, subsections (2) and (3) do not. The test under subsections (2) and (3) is not whether the defendant's false claim was "presented" to the government, but whether the defendant made a false statement for the purpose of causing the government to pay a false claim. To illustrate, the Court explained that a subcontractor violates subsection (2) whenever it makes a false statement to the prime contractor, "intending for the statement to be used by the prime contractor to get the Government to pay its claim," even if the prime contractor never "presents" the false statement to the government.
With this decision some, but not all, in the business community can breathe a collective sigh of relief. Companies need no longer fear that they risk liability under the FCA simply by doing business with a federal grantee. But any company that serves as a subcontractor on a government project faces new liability. As long as "presentment" was required it was difficult for a relator to prove an FCA claim against a subcontractor. Subcontractors typically send their invoices to, and are paid by, the prime contractor. When the prime contractor invoices the government, it may not "present" the government with a copy of the subcontractor's invoice.
This is certainly true on defense contracts. The government pays the prime contractor on a Defense Department project without seeing the subcontractor's invoice or even knowing the amount the subcontractor has been paid. But under Allison Engine, this no longer matters. On a cost-plus contract, a subcontractor who submits an inflated invoice will be liable under the FCA, if the prime contractor uses this invoice to calculate the amount of its own invoice to the government.
Subcontractors may also be liable for false statements made in connection with fixed price contracts, where the subcontractor is paid based, not on the costs it has incurred, but on the amount of progress it has made. A subcontractor who falsely certifies test results will be liable, if the prime contractor then invoices the government based on the subcontractor's false claim of progress. In short, companies that subcontract on government projects should make sure that their employees know about the FCA and how it applies to them.
Linda L. Listrom is a partner in Jenner & Block's Chicago office. She is a member of the firm's litigation department and a member of its business litigation practice. Listrom co-chairs the firm's defense and aerospace industry practice. She may be reached at firstname.lastname@example.org.
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