In December 2011, the Justice Department proudly announced that more than $3 billion was been recovered in cases involving alleged violations of the False Claims Act in 2011. With that recovery, plus the $3 billion that was collected in 2010, 2009, 2010, and 2011 saw the largest three-year collection total in Justice Department history. The aggressive approach taken by the Justice Department and the filing of sometimes lucrative qui tam actions show no signs of slowing up. In fact, an amicus brief recently submitted by the Justice Department provides insight into its expansive view of the False Claims Act and a possible strategy for making 2012 and beyond even bigger years for False Claims Act recoveries. Contractors be on notice!!
The Government’s Strategy
That strategy is related to the “reverse false claim” provision found at 31 U.S.C. § 3729(a)(7). In 2006, a “reverse false claim” was a false statement used to “conceal, avoid, or decrease an obligation to pay or transmit money or property to the Government.” In the 2009 Fraud Enforcement and Recovery Act (FERA), Congress expanded False Claims Act liability to include “knowingly or improperly [avoid]ing or decreas[ing] an obligation to pay or transmit money or property to the Government.” 31 U.S.C. § 3729(a)(1)(G). And the previously undefined term “obligation” is now defined as “an established duty, whether or not fixed, arising from an express or implied contractual, grantor-grantee, or licensor-licensee relationship, from a fee-based or similar relationship, from statute or regulation, or from the retention of any overpayment.” 31 U.S.C. § 3729(b) (3).
The Strategy in Practice
United States ex rel. Yannacopoulis v. General Dynamics was a qui tam False Claims Act suit brought by a relator against General Dynamics and Lockheed Martin. 652 F.3d 818 (7th Cir. 2011). The litigation related to an agreement by General Dynamics to sell Greece 40 F-16 fighters, as well as related services and equipment, under a fixed-price contract. But Greece was not paying General Dynamics directly. Instead, Greece financed the purchases through a loan from the United States in which General Dynamics would invoice the United States and that amount would be assessed against Greece’s trust account with the Treasury Department. After the execution of the contract, the parties (Greece and General Dynamics) agreed to certain unpriced reductions in scope. Among other claims, the relator argued General Dynamics (and Lockheed Martin as a result of its acquisition of General Dynamics) committed “reverse false claims.”
The government submitted an amicus brief on this point. The Justice Department argued that a government contractor has an extra-contractual duty to return an overpayment when a decision is made to reduce the scope of its work—even before a binding amendment has been executed modifying the contract. Thus, in the Justice Department’s view, whether the parties to the contract have “agreed among themselves to formally modify their contract . . . is wholly irrelevant.” In other words, a contractor must return money as soon as it is aware that it could have an obligation to refund a payment. The Justice Department asserted that “a contractor who has been paid in advance for work it does not perform has an ‘obligation’ to refund the overpayment to the government, and a contractor that uses false records or statements to conceal that obligation is liable under the False Claims Act . . . .”
According to the government, General Dynamics was guilty of “reverse false claims” when it and Greece reassessed and “agreed in principle” to reduce the scope of a portion of the contract because General Dynamics continued receiving payments for full performance—even though the contract was not amended through an executed modification until roughly four years later. The government further argued that an obligation need not be fixed before statutory liability can arise.
The Seventh Circuit upheld the district court’s grant of summary judgment to General Dynamics and Lockheed Martin, but it did not address the government’s arguments. The court simply found that the relator failed to provide any evidence showing the General Dynamics’ statements were false.
Without a ruling by the court, it is unknown how the government’s expanded view of the False Claims Act will be received. The Justice Department’s position in its amicus brief exposes contractors to possible reverse false claim liability whenever a contractor is paid before the scope of work is completed. Consider a government construction project that has been delayed, with the government advising the contractor that liquidated damages may be assessed. The project may be completed, and the contractor substantially paid for the completed work, before the government finally decides to assess liquidated damages. Under the Justice Department’s theory of a reverse false claim, is the contractor liable for a reverse false claim because it was “overpaid”, i.e., it knew that some of the money might have to be returned to the government?
Until a court decision is issued giving guidance, a contractor could be surprised by a government False Claim allegation or a qui tam action by a diligent relator following the government’s theory in Yannacopoulos. Keep in mind as well that the government’s second argument, that the obligation need not be fixed, is part of the False Claims Act after FERA. See § 3729(b) (3). The government made the argument in Yannacopoulos hoping to retroactively apply the expanded coverage to conduct occurring before FERA. Now, an “obligation” does not need to be fixed before it arises.