Economic Stimulus and False Claims Act Liability

One important source of potential liability is the False Claims Act (the “FCA”). Although it has been amended numerous times during the more than 145 years since it was enacted, the FCA is, at its core, a Civil War-era statute that was initially passed to combat the allegedly fraudulent and improper actions of defense contractors who supplied the Union Army with inferior horses, faulty weapons, and spoiled rations at exorbitant prices. The FCA protects Government funds and property from false or fraudulent claims and provides for liability for any person who “(1) knowingly presents or causes to be presented, to an officer or employee of the United States Government ' a false or fraudulent claim for payment or approval; [or] (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.” 31 U.S.C. ' 3729(a). The FCA provides for statutory penalties of between $5,500 and $11,000 per violation, plus up to three times the amount of damages that the government sustains on account of the false claim. Typically, FCA claims fall into two categories: grant fraud and what can be termed “fraudulent invoices.”

The classic FCA claim concerns a vendor of goods or services to the government that submits fraudulent invoices. This fact pattern is likely inapplicable in most ARRA or stimulus-related situations in which the stimulus recipient receives a one-time grant, tax credit, or loan guarantee, but does not submit any subsequent “claim for payment” within the meaning of the FCA. The ARRA or stimulus-related FCA claim is much more likely to be a so-called “fraudulent inducement” claim, that is, a claim in which the defendant is alleged to have lied or otherwise defrauded the government in securing stimulus support.

Recent Case Law

Because ARRA was enacted earlier this year, there is no case law that analyzes FCA claims relating to ARRA specifically. However, there are cases applying the FCA to abuses in similar government grant contexts. The government views grant money as a way to encourage private entities to do tasks which inure to the public good. In the eyes of the government, grants are not merely benevolent gifts, they are not entitlements and a recipient does not have any property interest whatsoever in grant funds. The cases applying the FCA to abuses in other government grant contexts likely provide good guidance as to how a court might apply the FCA in an ARRA or stimulus context. The most recent of these cases is the U.S. Court of Appeals for the Fifth Circuit's decision in United States ex rel. Longhi v. Lithium Power Technologies, Inc., 575 F.3d 458 (5th Cir. 2009).

The court in Longhi analyzed the FCA in the context of a technology company which had received a Government grant under the Small Business Innovation Research (“SBIR”) program. Under this program, small businesses apply for competitive grants which are intended to be used for research and development in areas of interest to the agencies making the grant. Similar to the ARRA stimulus programs, the SBIR grant program provides grant recipients with funding to support work that is of interest to the government while not necessarily resulting in goods or services that will be purchased or consumed by the government directly. The court in Longhi upheld a lower court decision finding that an SBIR grant recipient induced the government to make the grant by, at a minimum, showing reckless disregard for the truth in many of the representations made in the relevant grant applications. The misrepresentations at issue ranged from the seemingly innocuous (misrepresentation of the applicant's date of incorporation) to the more egregious (knowingly false statements concerning the applicant's facilities and equipment).

Four elements are required to prove a fraudulent inducement claim under the FCA: 1) There was a false or fraudulent course of conduct; 2) made or carried out with the requisite scienter; 3) that was material; and 4) that caused the government to pay out money or to forfeit moneys due. Longhi, 575 F.3d at 467. To satisfy the first element of a fraudulent inducement claim, the statement or conduct alleged must represent an objective falsehood. United States ex rel. Wilson v. Kellogg, Brown & Root, Inc., 525 F.3d 370, 376-77 (4th Cir. 1999). The scienter requirement comes from the statutory definition of the terms “knowing” and “knowingly.” Accordingly, the plaintiff must prove that the maker of the alleged false statement: 1) had actual knowledge of the falsity; 2) acted with deliberate ignorance of the truth or falsity of the information provided; or 3) acted with reckless disregard of the truth or falsity of the information it provided when it induced the government to make the grant. 31 U.S.C. ' 3729(b). A “false statement is material if it has a natural tendency to influence, or is capable of influencing, the decision of the decision making body to which it was addressed.” Longhi, 575 F.3d at 468. The fourth element of the claim is satisfied by proving that the knowing, material, and false statement caused the government to pay out money.

Once a fraudulent inducement claim has been established, the FCA provides for two types of liability: First, there are statutory penalties of not less than $5,500 and not more than $11,000 per violation. Each individual false claim or statement triggers the civil penalty. Thus, where a claimant has submitted several false claims under the same fraudulently induced contract, the claimant will be liable for several statutory penalties. The false claimant is liable for these statutory penalties even if the government has suffered no loss as a result of the claim. Second, and in addition to the statutory penalties, the FCA provides for the recovery of damages if the government suffers a loss that was caused by the fraudulent claim or statement.

It is through this second category of damages that the Longhi decision's importance to stimulus applicants and recipients becomes clear. The defendant in Longhi argued that because the SBIR grants at issue did not produce a tangible benefit to the government ' like many stimulus grants, the end product of SBIR grants belongs to the grant recipient and not the government ' the government suffered no damages on account of any fraudulent inducement by the grant recipient. After holding that the benefit received by the government in making the grants was the intangible benefit of providing a grant to an “eligible deserving” applicant, the Fifth Circuit upheld the lower court decision finding that the proper amount of damages is treble the amount of the grant itself. Id. at 473. The defendant in Longhi was adjudged to have fraudulently induced the government to grant it a little more than $1.6 million, and as a result the defendant was ordered to pay damages of $4.9 million.

Stimulus Recipients Beware

In addition to being brought by the government directly, FCA claims can and often are asserted by private persons, known as “relators,” who bring suit on behalf of the government and stand to share in a percentage of any recovery that is obtained from the litigation. 31 U.S.C. ' 3730(b). Often, relators are disgruntled former employees who use this law to air past grievances and to punish former employers. A relator files the FCA complaint, initiating what is known as a qui tam case, under seal and serves it on the government, which then investigates the case and determines whether it will intervene and take over prosecution of the case. Id. A relator is the plaintiff in a Federal civil action, just like any other lawsuit; the only real procedural differences are that the case is initially under seal and secret from the defendant and the government may take over prosecution of the case after its investigation of the bona fides of the claims. The case typically remains under seal during the investigation. The first indication most defendants have that a qui tam case may be pending is a visit from a government investigator. By statute, the government has 60 days to conduct its investigation, but this period will typically be extended on request of the government on a showing of good cause. Id. It is not unheard-of for these investigations to drag on for more than two years and for the FCA case to remain under seal throughout that time. If the government decides not to intervene, the relator is still free to pursue the case but must do so at his own initial expense.

Other Important Features

Two other important features to understand about the unique challenges presented by FCA liability are that a relator who brings a case that the government prosecutes and wins shall be awarded: 1) his reasonable expenses, including attorneys' fees; and 2) at least 15% but not more than 25% of the proceeds of the action or the settlement of the claim. 31 U.S.C. ' 3730(d). If the government does not prosecute the action and the relator prevails, the relator gets expenses and between 25% and 30% of the proceeds of the action or the settlement of the claim. Id. The relator who brings a legitimate cause of action risks only the costs of litigation ' which will often be absorbed by the plaintiff's attorney on a contingency basis ' and stands to gain a substantial sum if successful. Moreover, if the government elects to intervene, the relator may rely on the resources of the government to prosecute the case. These factors have resulted in an aggressive plaintiffs' bar that is willing to help just about any willing relator pursue a case. This law also creates an easy and potentially lucrative way for disgruntled former employees to punish their former employers.

Conclusion

Without proper understanding and handling, FCA liability has the potential to convert the receipt of Federal stimulus funds from a bounty that could sustain a company through this downturn into a major problem which, depending on the scope and amount of stimulus funds received, could threaten the very survival of the recipient. The specter of FCA liability makes it necessary for stimulus grant applicants to be particularly mindful of the honesty and accuracy of the representations made in their grant applications and subsequent grant-related communications. Being mindful of the potential threats embodied in the FCA is an important step toward making sure that stimulus funds serve their purpose and help your company survive and thrive into the future.

David Lee Tayman is an attorney in Dickstein Shapiro LLP's Washington, DC, office. In addition to his commercial litigation and bankruptcy practice, he has significant experience representing clients in False Claims Act litigation and counseling clients in stimulus-related matters. He can be reached at [email protected] or 202-420-4728.

Over the past several months, most of us have seen the literal signs of government stimulus alongside the highways and byways we travel ' “Putting America to Work, This Project Funded by the American Recovery and Reinvestment Act,” reads a typical placard. The American Recovery and Reinvestment Act of 2009 (“ARRA”) encompasses a number of government programs designed to stimulate the economy, including “Payments for Specified Energy Projects In Lieu of Tax Credits” (PILOTCs), the “Community Development Financial Institutions Fund,” the “New Markets Tax Credit,” grants to states for low income housing projects in lieu of low income housing tax credit allocations, Department of Energy loan guarantees, and others.

Given the current economic climate, there has been strong interest in these programs. Due to the slowdown of general commercial activity, many stimulus applicants and recipients are companies that have traditionally done little, if any, business with the government. Setting aside the contentious issue of whether stimulus activities are good for the economy at large, it is important that applicants for, and recipients of, stimulus funds realize that participation in these programs could result not only in significant benefits, but also in exposure to legal liability. The peculiarities of Government procurement and grant programs are not novel, but could be beyond the expectation of a company used to doing business solely in the private sector.

The False Claims Act

One important source of potential liability is the False Claims Act (the “FCA”). Although it has been amended numerous times during the more than 145 years since it was enacted, the FCA is, at its core, a Civil War-era statute that was initially passed to combat the allegedly fraudulent and improper actions of defense contractors who supplied the Union Army with inferior horses, faulty weapons, and spoiled rations at exorbitant prices. The FCA protects Government funds and property from false or fraudulent claims and provides for liability for any person who “(1) knowingly presents or causes to be presented, to an officer or employee of the United States Government ' a false or fraudulent claim for payment or approval; [or] (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.” 31 U.S.C. ' 3729(a). The FCA provides for statutory penalties of between $5,500 and $11,000 per violation, plus up to three times the amount of damages that the government sustains on account of the false claim. Typically, FCA claims fall into two categories: grant fraud and what can be termed “fraudulent invoices.”

The classic FCA claim concerns a vendor of goods or services to the government that submits fraudulent invoices. This fact pattern is likely inapplicable in most ARRA or stimulus-related situations in which the stimulus recipient receives a one-time grant, tax credit, or loan guarantee, but does not submit any subsequent “claim for payment” within the meaning of the FCA. The ARRA or stimulus-related FCA claim is much more likely to be a so-called “fraudulent inducement” claim, that is, a claim in which the defendant is alleged to have lied or otherwise defrauded the government in securing stimulus support.

Recent Case Law

Because ARRA was enacted earlier this year, there is no case law that analyzes FCA claims relating to ARRA specifically. However, there are cases applying the FCA to abuses in similar government grant contexts. The government views grant money as a way to encourage private entities to do tasks which inure to the public good. In the eyes of the government, grants are not merely benevolent gifts, they are not entitlements and a recipient does not have any property interest whatsoever in grant funds. The cases applying the FCA to abuses in other government grant contexts likely provide good guidance as to how a court might apply the FCA in an ARRA or stimulus context. The most recent of these cases is the U.S. Court of Appeals for the Fifth Circuit's decision in United States ex rel. Longhi v. Lithium Power Technologies, Inc. , 575 F.3d 458 (5th Cir. 2009).

The court in Longhi analyzed the FCA in the context of a technology company which had received a Government grant under the Small Business Innovation Research (“SBIR”) program. Under this program, small businesses apply for competitive grants which are intended to be used for research and development in areas of interest to the agencies making the grant. Similar to the ARRA stimulus programs, the SBIR grant program provides grant recipients with funding to support work that is of interest to the government while not necessarily resulting in goods or services that will be purchased or consumed by the government directly. The court in Longhi upheld a lower court decision finding that an SBIR grant recipient induced the government to make the grant by, at a minimum, showing reckless disregard for the truth in many of the representations made in the relevant grant applications. The misrepresentations at issue ranged from the seemingly innocuous (misrepresentation of the applicant's date of incorporation) to the more egregious (knowingly false statements concerning the applicant's facilities and equipment).

Four elements are required to prove a fraudulent inducement claim under the FCA: 1) There was a false or fraudulent course of conduct; 2) made or carried out with the requisite scienter; 3) that was material; and 4) that caused the government to pay out money or to forfeit moneys due. Longhi, 575 F.3d at 467. To satisfy the first element of a fraudulent inducement claim, the statement or conduct alleged must represent an objective falsehood. United States ex rel. Wilson v. Kellogg, Brown & Root, Inc. , 525 F.3d 370, 376-77 (4th Cir. 1999). The scienter requirement comes from the statutory definition of the terms “knowing” and “knowingly.” Accordingly, the plaintiff must prove that the maker of the alleged false statement: 1) had actual knowledge of the falsity; 2) acted with deliberate ignorance of the truth or falsity of the information provided; or 3) acted with reckless disregard of the truth or falsity of the information it provided when it induced the government to make the grant. 31 U.S.C. ' 3729(b). A “false statement is material if it has a natural tendency to influence, or is capable of influencing, the decision of the decision making body to which it was addressed.” Longhi, 575 F.3d at 468. The fourth element of the claim is satisfied by proving that the knowing, material, and false statement caused the government to pay out money.

Once a fraudulent inducement claim has been established, the FCA provides for two types of liability: First, there are statutory penalties of not less than $5,500 and not more than $11,000 per violation. Each individual false claim or statement triggers the civil penalty. Thus, where a claimant has submitted several false claims under the same fraudulently induced contract, the claimant will be liable for several statutory penalties. The false claimant is liable for these statutory penalties even if the government has suffered no loss as a result of the claim. Second, and in addition to the statutory penalties, the FCA provides for the recovery of damages if the government suffers a loss that was caused by the fraudulent claim or statement.

It is through this second category of damages that the Longhi decision's importance to stimulus applicants and recipients becomes clear. The defendant in Longhi argued that because the SBIR grants at issue did not produce a tangible benefit to the government ' like many stimulus grants, the end product of SBIR grants belongs to the grant recipient and not the government ' the government suffered no damages on account of any fraudulent inducement by the grant recipient. After holding that the benefit received by the government in making the grants was the intangible benefit of providing a grant to an “eligible deserving” applicant, the Fifth Circuit upheld the lower court decision finding that the proper amount of damages is treble the amount of the grant itself. Id. at 473. The defendant in Longhi was adjudged to have fraudulently induced the government to grant it a little more than $1.6 million, and as a result the defendant was ordered to pay damages of $4.9 million.

Stimulus Recipients Beware

In addition to being brought by the government directly, FCA claims can and often are asserted by private persons, known as “relators,” who bring suit on behalf of the government and stand to share in a percentage of any recovery that is obtained from the litigation. 31 U.S.C. ' 3730(b). Often, relators are disgruntled former employees who use this law to air past grievances and to punish former employers. A relator files the FCA complaint, initiating what is known as a qui tam case, under seal and serves it on the government, which then investigates the case and determines whether it will intervene and take over prosecution of the case. Id. A relator is the plaintiff in a Federal civil action, just like any other lawsuit; the only real procedural differences are that the case is initially under seal and secret from the defendant and the government may take over prosecution of the case after its investigation of the bona fides of the claims. The case typically remains under seal during the investigation. The first indication most defendants have that a qui tam case may be pending is a visit from a government investigator. By statute, the government has 60 days to conduct its investigation, but this period will typically be extended on request of the government on a showing of good cause. Id. It is not unheard-of for these investigations to drag on for more than two years and for the FCA case to remain under seal throughout that time. If the government decides not to intervene, the relator is still free to pursue the case but must do so at his own initial expense.

Other Important Features

Two other important features to understand about the unique challenges presented by FCA liability are that a relator who brings a case that the government prosecutes and wins shall be awarded: 1) his reasonable expenses, including attorneys' fees; and 2) at least 15% but not more than 25% of the proceeds of the action or the settlement of the claim. 31 U.S.C. ' 3730(d). If the government does not prosecute the action and the relator prevails, the relator gets expenses and between 25% and 30% of the proceeds of the action or the settlement of the claim. Id. The relator who brings a legitimate cause of action risks only the costs of litigation ' which will often be absorbed by the plaintiff's attorney on a contingency basis ' and stands to gain a substantial sum if successful. Moreover, if the government elects to intervene, the relator may rely on the resources of the government to prosecute the case. These factors have resulted in an aggressive plaintiffs' bar that is willing to help just about any willing relator pursue a case. This law also creates an easy and potentially lucrative way for disgruntled former employees to punish their former employers.

Conclusion

Without proper understanding and handling, FCA liability has the potential to convert the receipt of Federal stimulus funds from a bounty that could sustain a company through this downturn into a major problem which, depending on the scope and amount of stimulus funds received, could threaten the very survival of the recipient. The specter of FCA liability makes it necessary for stimulus grant applicants to be particularly mindful of the honesty and accuracy of the representations made in their grant applications and subsequent grant-related communications. Being mindful of the potential threats embodied in the FCA is an important step toward making sure that stimulus funds serve their purpose and help your company survive and thrive into the future.

David Lee Tayman is an attorney in Dickstein Shapiro LLP's Washington, DC, office. In addition to his commercial litigation and bankruptcy practice, he has significant experience representing clients in False Claims Act litigation and counseling clients in stimulus-related matters. He can be reached at [email protected] or 202-420-4728.