The Supreme Court may not be the highest court in the land, but when the Court rules, it’s best to pay attention. Recently, a Supreme Court decision helped clarify how the False Claims Act should be applied. While this case involved the medical industry, the False Claims Act applies to all parties that contract with the Federal Government. The decision could impact construction industry in a variety of ways, including filing bonds, P3 projects, and EB-5 projects to name a few.
What is the False Claims Act?
The False Claims Act (FCA) was passed to combat fraud against the federal government. The act allows private parties to sue against those who commit fraud against government programs, and incentivizes private third parties to bring suit by providing for treble damages and a portion of awards to the party bringing the case. These damages are also intended to deter bad actors, as facing three times as much in damages scares off would-be perpetrators.
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Because of the significant damages, the Act is not intended to impose penalties for insignificant violations. Nor is the Act intended to combat all fraud. The FCA is only concerned with fraud as it involves a party’s relationship with the federal government. In order to face liability under the act, the fraudulent party must have either known about the misrepresentation, deliberately turned a blind eye, or otherwise displayed reckless disregard for obtaining the truth or falsity of the representation.
How does it apply to construction industry?
The FCA applies to all parties with a relationship to the Federal Government. Contractors and subs who act fraudulently when working on a federal project would certainly fall under the scope of the act. While the FCA applies to obvious contractual situations between a private entity and the federal government, it also extends to those projects receiving federal aid or assistance that may be less obvious. P3 projects would fall under the act when dealing with a federal entity. EB-5 investors reap benefits from the federal government, so a fraud case could certainly fall under the False Claims Act. If a party is receiving federal benefits on a green construction project, the Act might apply as well.
Supreme Court Findings
Implied Certification Theory
The first question answered by the Supreme Court established that implied certification theory could serve as a basis for liability under the False Claims Act. This means that by submitting a claim for payment to the government, a party is certifying that all regulations, statutes, and contractual requirements have been met. The Court stated that implied certification could give rise to liability under the False Claims Act, at least when these two factors are met:
(1) The claim must go beyond a mere request for payment. Specific representations of the goods and services should be provided.
(2) The failure to disclose noncompliance with the relevant regulations or requirements makes those representations misleading half-truths.
The second question addressed by the court was the standard of conduct that creates liability under the act. Specifically, must the conduct breach a contractual, regulatory, or statutory provision that was explicitly designated as a condition of payment in order to establish an actionable claim?
The Supreme Court noted that to establish the materiality of the misrepresentation is imperative to determining whether the False Claims Act applies. Whether or not a requirement has been designated as a condition of payment is merely influential, not a deciding factor. If the defendant knows that the government would not pay the claim if it were aware of the misrepresentation, it would likely be material. However, if it is the type of misrepresentation that the government regularly overlooks and would not cause a refusal of payment, this would lean toward non-materiality. If the government has actual knowledge of the error and still pays the claim, this would be the strongest evidence of non-materiality. In short, the Supreme Court established what is essentially a “totality of the circumstances” approach when determining if the misrepresentation is material.
What to Learn
When dealing with the federal government the stakes are raised. Under the False Claims Act, parties who defraud the government may face treble damages. Intent to defraud is not always necessary. The Court may impose implied certification on the private party. By submitting a claim for payment, the actor impliedly certifies that they are in compliance with all necessary contractual, statutory, and regulatory requirements. Due to the steep penalties of the False Claims Act, insignificant violations will not trigger liability. The requirement must be material in order to rise to FCA liability. Just because a requirement of the contract is labeled as a condition of payment does not make a misrepresentation material. But the reverse is also true. A requirement not included as a condition of payment could rise to the level of materiality. The issue essentially turns on the situation as a whole, and factors on both sides will be weighed to determine the materiality of a misrepresentation.