Contractors Beware: New Supreme Court Decision on False Claims Act
The Supreme Court recently issued a decision in Universal Health Services v. United States ex rel. Escobar, and construction contractors should take note in order to better understand the broad reach of liability and hefty penalties under the False Claims Act (FCA).
The decision was a win for the government in that it allowed FCA claims brought on what is known as the "implied false certification theory" to continue. For contractors, this means that a court can treat the act of submitting a payment application as the contractor's certification that it has complied fully with all laws, regulations and contract terms. If violations do exist and the contractor has not disclosed them, this is interpreted as a misrepresentation. Importantly though, the violations must be material, or of sufficient importance to the contract. As can be expected, what is considered "material" in any given case is the subject of many court battles. The Supreme Court's new test requires a look at the essence of the contract itself to determine materiality, and not just a glance at whether the requirement violated was an express condition of payment, as was argued by the government.
For those unfamiliar with it, the federal FCA dates back to the Civil War era, and allows the government to recover treble damages against contractors that knowingly present false or fraudulent claims for payment on government contracts. The FCA also is interesting because it authorizes private individuals (referred to as relators) to assist in its enforcement. Should the government not be aware of a potential FCA violation, the relator may file suit, and is rewarded with a share of the proceeds if false claims are discovered. Several states have also developed their own false claims statutes, many of which are modeled after the federal FCA, so developments at the national level are far-reaching, even outside the world of federal procurement.
While the facts of the Universal Health case involved health service providers, the FCA applies to all industries. As construction contractors who have worked on government contracts at any level are well aware, the regulations involved are long and dense. Contractors need to be especially wary of noncompliance with material terms, lest they discover that implicit in their requests for payment are misrepresentations of compliance. It remains to be seen what types of violations courts will find material under the new test, but in the construction realm the possibilities range from the obvious – overcharging for hours, sub-standard materials, or falsification of minority status, to the more concerning, such as compliance with all Davis Bacon Act or Occupational Safety and Health Administration requirements. In sum, compliance with regulations and material contract terms has become even more important, and contractors best be mindful of the FCA and the full implications when they submit payment applications on government projects.
If you have any questions about the implications of this decision, please contact Bob Huber, Susan McGreevy, Christy Milliken or the Stinson Leonard Street attorney with whom you regularly work.