While the False Claims Act (“FCA”) is far from new, the Department of Justice (“DOJ”) has shown a marked increase in government-initiated enforcement actions over the last four years. Touted as the government’s most powerful civil anti-fraud statute, the DOJ leveraged the FCA to recover more than $2.68 billion from fraudsters in fiscal year 2023. If you are a government contractor committed to not finding yourself and your company on the wrong side of an FCA action, below are some FCA fundamentals.
Anti-Fraud Statute
The FCA makes it illegal to present false statements in writing to the United States government in order to obtain money or reimbursement to which a party is not entitled. The FCA is an important tool to prevent fraud against the government, including government contractor and procurement fraud.
Recently, the United States Supreme Court, in two consolidated cases, U.S. ex rel. Schutte v. SuperValu Inc. and U.S. ex rel. Proctor v. Safeway Inc., addressed the FCA’a “knowledge” requirement. As brief background, the cases involved allegations related to Medicaid and Medicare drug pricing, specifically, the definition of “usual and customary price” as the price charged to the general public. SuperValu and Safeway reported the usual and customary price as its retail cash prices, despite charging certain customer lower amounts under prescription drug discount programs. The Supreme Court held that a defendant’s liability turns on its actual, subjective belief of a requirement material to the government’s reimbursement decision, not a defendant’s objectively reasonable interpretation of the requirement. According to the Supreme Court, a defendant can be liable if it either (i) “actually knew” that its conduct was unlawful, (ii) was “aware of a substantial risk” of unlawfulness “and intentionally avoided learning” about its conduct’s legality, or (iii) was “aware of such a substantial and unjustifiable risk but submitted the claims anyway.” In practice, the decision expands the FCA’s knowledge standard and raises questions regarding what “substantial and unjustifiable risk” is for companies that contract with the government.
Qui Tam Actions
The FCA features a qui tam provision, which permits whistleblowers, known as “relators,” to bring claims in the government’s name against those perpetuating fraud against the government and to share in any recovery. A relator files the qui tam lawsuit under seal, and the FCA gives the government 60 days to review the information and decide whether to join the lawsuit. After 60 days, the lawsuit is unsealed and proceeds, regardless of whether the government joins. If the case concludes successfully by settlement or verdict, the relator may recover a percentage of the proceeds, including damages and penalties. This statutory scheme creates incentives for employees and non-employees alike to monitor for and report questionable conduct by government contractors.
FCA Penalties and Damages
The federal FCA imposes civil penalties, adjusted for inflation, plus up to three times the amount of damages the government sustained because of the violation. Each separate false claim or violation triggers the FCA’s civil penalties. There is also a criminal FCA with penalties that include imprisonment and criminal fines.
In 2023, “[s]ettlements and judgments under the False Claims Act exceeded $2.68 billion.”. According to the Department of Justice, “[t]he recoveries in fiscal year 2023 . . . reflect the department’s focus on key enforcement priorities, including fraud in pandemic relief programs and alleged violations of cybersecurity requirements in government contracts and grants.” In an exemplar settlement in the government procurement fraud context, the government obtained $377 million against Booz Allen Hamilton Holding Company to resolve a qui tam lawsuit by a former Booz Allen employee that Booz Allen obtained reimbursement from the government for the costs of non-governmental activities that provided no benefit to the government.
Recent FCA Reforms Proposed by Congress
In 2023, the False Claims Amendments Act of 2023 (FCAA), bipartisan legislation to amend to the FCA, was introduced in the Senate. The proposed amendments are twofold: (1) expand protections to whistleblowers against employer retaliation and (2) memorialize that continuing payments by the government do not shield fraudsters from FCA liability.
With respect to broadening the protections for whistleblowers, the FCAA extends the FCA’s anti-retaliation protections to both current and former employees. The proposed expansion will likely broaden the pool of whistleblowers coming forward to disclose fraud and increase the number qui tam actions under the FCA.
The FCAA also aims to update the materiality requirement of the FCA to remove the argument that continued government payment provides compelling evidence of the lack of materiality. By way of background, the FCA only imposes liability on those who violate a material contractual, statutory, or regulatory requirement. The proposed legislation states, in relevant part that, “the decision of the Government . . . to pay a claim despite actual knowledge of fraud or falsity shall not be considered dispositive if other reasons exist for the decision of the Government with respect to such . . . payment.” FCAA, S. 2466, 118th Cong. § 2(e).
The proposed legislation is a direct response to the Supreme Court’s holding in Universal Health Servs. v. United States ex rel. Escobar, 579 U.S. 176, 195 (2016) that continued payment by the government is “very strong evidence” pointing to lack of materiality. In Escobar, the Supreme Court held that the FCA’s materiality requirement is “demanding” and continued payments by the government defeated the FCA’s materiality standard for prosecution. Escobar effectively created a “loophole” for companies committing fraud to defend against FCA violations simply by showing continued government payments. The FCAA attempts to remove this loophole by allowing the government to come forward with other reasons that may exist for continued payments.
The FCAA was introduced as Senate Bill 2466 on July 25, 2023, and was referred to the Judiciary Committee. We will continue to monitor the FCAA’s progress.
For more information on the FCA or for assistance in defending a case under the FCA, contact Nicole Vele at (202) 844-3828 or Nicole.Vele@michaelbest.com or Ena M. Allen at (414) 225-2771 or Ena.Allen@michaelbest.com.