In latest edition of The Wright Toolbox:
What Does the Supreme Court’s Latest FCA Decision Portend for Future Cases involving the Construction Industry?
Last week, the Supreme Court issued a significant and highly-anticipated decision in two consolidated False Claims Act (FCA) cases addressing the meaning of the statute’s “knowingly” requirement, a frequently raised defense in FCA cases involving the interpretation of often complex, federal regulatory schemes and contracts that had previously resulted in a split among the circuits. In both United States ex rel. Schutte v. SuperValu, Inc.[1] and United States ex rel. Proctor v. Safeway, Inc.,[2] the Seventh Circuit had affirmed decisions granting summary judgment in favor of the defendant pharmacies, holding that they could not have “knowingly” overcharged Medicaid and Medicare by submitting drug reimbursement claims at their retail pricing rates rather than at discounted pricing rates offered to some customers because using retail pricing could be an objectively reasonably interpretation of the “usual and customary” language found in the applicable federal regulations. In a 9-0 decision, the Supreme Court vacated and remanded the cases back to the Seventh Circuit, rejecting the concept of a “purely objective safe harbor” and holding that the FCA’s scienter component “refers to respondents’ knowledge and subjective belief — not to what an objectively reasonable person may have known or believed.”[3] In the future, courts construing FCA liability must focus on the individual defendant’s state of mind and beliefs at the time of claim transmittal.
Brief Background on the FCA
The federal government passed the original version of the FCA back in 1863 in response to rampant fraud by unscrupulous government contractors during the Civil War.[4] The FCA is one of the few pieces of legislation that allows a qui tam cause of action[5] whereby a private individual, or “relator,” can bring a lawsuit on the government’s behalf, although the Department of Justice (DOJ) can also bring a direct action. Frequently, FCA relators are current or former employees of a targeted defendant, popularly referred to in this and other contexts as “whistleblowers.” Access to insider information and records makes it easier for such whistleblowers to discover fraudulent behavior that could be actionable under the FCA.
There have been many amendments to the FCA during its long history, often involving weakening or strengthening the qui tam provisions of the FCA due to then-current trends in federal government spending and its impact on the magnitude of perceived government contracting fraud. Amendments enacted in 2009 and 2010 established the FCA in its current form,[6] under which there are four different types of claims:
- Knowingly presenting, or causing to be presented, a false or fraudulent claim for payment (“presentment claim”);[7]
- Knowingly making a false statement or record in order to have a claim paid (“false statements claim”);[8]
- Conspiring with others to defraud in order to have a claim paid (“conspiracy claim”);[9] and
- Making or using a false record or statement to avoid an obligation to pay money to the federal government (“reverse false claim”).[10]
The knowledge requirement of the FCA essentially mirrors the common law scienter requirement to prove fraud: actual knowledge, deliberate ignorance of the truth or falsity, or reckless disregard for the truth or falsity of the information or claim presented.[11] Interestingly, there is no FCA requirement to prove a specific intent to defraud or deceive.[12]
FCA Activity in the Federal Construction Contracting Arena
While the majority of FCA whistleblower actions continue to focus on fraud in the health care industry (typically involving Medicare or Medicaid reimbursements),[13] the enactment of the Small Business Jobs Act in 2010 provided a greater incentive for the DOJ and whistleblowers to pursue FCA claims related to construction procurement fraud. A contractor’s false certification of its compliance with small and disadvantaged business set-aside requirements that are common in the public contracting arena has always been illegal; however, there was previously little financial motivation to pursue FCA liability for such false certifications because the federal government had trouble showing that it suffered an actual economic loss as a result of a contractor’s own false certification or improper use of noncompliant subcontractors.
The Small Business Jobs Act removed this obstacle by eliminating the necessity of showing actual economic loss for set-aside contract violations,[14] a provision now commonly referred to as the “Presumed Loss Rule.” The Presumed Loss Rule is based on the notion that the federal government’s harm from such violations is not primarily economic in nature but rather arises from “business and experience being improperly shifted away from small business and women-owned small businesses.”[15] The Presumed Loss Rule applies both to the putative small business itself and any other party making representations to the federal government about that small business’s status, including general contractors making representations about their subcontractors.[16] Coupled with the FCA’s treble damages rule, this means that a false certification or statement leading to a set-aside contract being awarded to a non-qualifying business could result in FCA lability up to three times the amount of the value of each contract awarded, plus statutory penalties and fees, even though the federal government may have received the full economic value of the materials and services for which it contracted. This potential lucrative payday has and will continue to entice both the DOJ and whistleblowers to pursue FCA litigation against federal construction contractors and in some cases, their bonding agents and sureties[17]) challenging their compliance with various set-aside programs and other applicable regulations.
Impact of the Supreme Court Decision
By rejecting any objective, law-based standard in favor of a subjective, fact-based standard, the Supreme Court provided a victory for the DOJ and whistleblowers. The new decision will make it much more difficult for FCA defendants to secure a quick dismissal through a motion to dismiss or even the summary judgment process, unless the defendant had the forethought to contemporaneously document its subjective analysis and intent. Rather, a heavily fact-driven standard will likely result in time-consuming and costly discovery processes to uncover evidence of what the defendant actually thought a particular statute, regulation or contract term meant and its intent at the time of claim submission. Given the lengthy FCA limitations period and unique litigation procedures involving qui tam actions, the defendant’s claim submission may have taken place many years or even a decade before the discovery phase of the case.
Future FCA defendants may also have to weigh tricky attorney-client privilege issues including the voluntary waiver of privilege to be able to prove subjective intent in cases where they sought contemporaneous legal guidance related to the interpretation of a relevant statute, regulation or contract term. Whether this newly confirmed FCA standard will result in the filing of more cases against, and more settlements by, federal construction contractors remains to be seen but federal construction contractors would be wise to take steps now to protect their actions from future challenges.
If you have questions regarding the issues discussed in this post, please do not hesitate to contact Cynthia Rodgers-Waire (410-659-1310 or crodgers-waire@wcslaw.com).
Source List:
[1] 9 F.4th 455 (7th Cir. 2021).
[2] 30 F.4th 649 (7th Cir. 2022).
[3] 598 U.S. _____ 2023; No. 22-111, 2023 WL 3742577, at *6, *9 (U.S. June 1, 2023).
[4] 12 Stat. 696.
[5] Qui tam is short for the Latin phrase qui tam pro domino rege quam pro se ipso in hac parte sequitur, or one who “pursues this action on our Lord the King’s behalf as well as his own.” Vermont Agency of Natural Res. v. United States ex rel. Stevens, 529 U.S. 765, 768 n.1 (2000).
[6] Fraud Enforcement and Recovery Act, Pub. L. No. 111-21 § 4, 123 Stat. 1617, 1621-25 (2009).
[7] 31 U.S.C. § 3729(a)(1)(A).
[8] 31 U.S.C. § 3729(a)(1)(B).
[9] 31 U.S.C. § 3729(a)(1)(C).
[10] 31 U.S.C. § 3729(a)(1)(G).
[11] 31 U.S.C. § 3729(b)(1)(A).
[12] 31 U.S.C. § 3729(b)(1)(B). See also United States ex rel. K&R Ltd. Partnership v. Mass. Housing Fin. Agency, 530 F.3d 980, 981 (D.C. Cir. 2008).
[13] Each year, the DOJ publishes statistics on the number of FCA cases filed and the amount of recoveries in the prior fiscal year. The DOJ announced over $2.2 billion in FCA settlements and judgments in fiscal year 2022, of which over $1.7 billion involved matters involving the health care industry. By comparison, it reported $5.6 billion in recoveries for fiscal year 2021, of which over $5.0 billion related to matters involving the health care industry. It is likely that this substantial decrease in recoveries in FY 2022 relates to delays and backlogs in the prosecution of cases in the federal court system due to the ongoing COVID-19 pandemic rather than waning interest in prosecution of FCA cases as the number of new cases filed set a record high. In addition, fraud related to payments received through the Paycheck Protection Program under the CARES Act and other COVID-related relief programs is likely to continue to generate new FCA litigation for the foreseeable future.
[14] Specifically, the Act says: In every contract, subcontract [or] cooperative agreement…which is set aside, reserved, or otherwise classified as intended for award to small business concerns, there shall be a presumption of loss to the United States based on the total amount expended on the contract, subcontract, [or] cooperative agreement…whenever it is established that a business concern other than a small business concern willfully sought and received the award by misrepresentation. 15 U.S.C. § 632(w)(1).
[15] United States ex rel. Savage v. Washington Closure Hanford LLC, No. 2:10-CV-05051-SMJ, 2017 WL 3667709, at *3 (E.D. Wash. Aug. 24, 2017).
[16] Savage, 2017 WL 3667709, at *4. However the Federal Acquisition Regulations provide a safe harbor for a general contractor relying solely on the subcontractor’s representations as to its compliance. See 48 C.F.R. § 52.219-9(c)(2).
[17] For example, United States ex rel. Scollick v. Narula, No. 1:14-cv-01339-RCL (D.D.C.) and Hanover Ins. Co. v. United States, 134 Fed. Cl. 51 (2017).