The potential for fraud prosecutions and civil actions related to funding under the American Recovery and Reinvestment Act of 2009 (Recovery Act) or based on the False Claims Act (FCA) may increase significantly if a bill recently passed by the Senate and amended by the House becomes law. On April 28, 2009, the Senate passed the Fraud Enforcement and Recovery Act (S. 386) by a vote of 92-4. The bill was immediately sent to the House, where on May 6, 2009 an amended version of the legislation, which was the product of House and Senate negotiations, was approved by a vote of 376-59. The bill will be sent back to the Senate for final approval. The bill is focused on improving the tools for prosecution of mortgage fraud and establishes a general crisis inquiry commission, but it also includes significant provisions relevant to government contractors.
Section 2(d) of the bill amends the Major Fraud statute, 18 U.S.C. § 1031, to make it applicable to transactions under the Troubled Asset Relief Program (TARP) and the Recovery Act. As amended, the Major Fraud statute would apply to any contract, subcontract, grant or other form of federal assistance, including through TARP or any economic stimulus, recovery plan or rescue plan provided by the Government. The Major Fraud statute covers fraud involving contracts over $1 million and can result in fines of $1 million (up to $10 million for multiple counts) and/or 10 years in prison. The bill targets fraud under the TARP within the banking industry, but the language used in the bill—economic stimulus, recovery or rescue plan"—is substantially broader. The bill also authorizes (although does not appropriate) additional funding for investigators and prosecutors for mortgage and securities fraud and "other cases involving federal economic assistance" (i.e., economic stimulus or Recovery Act transactions).
Section 4 of the bill makes several amendments to the FCA, in response to recent Court decisions. The Senate Judiciary Committee expressed concern that "[t]he effectiveness of the False Claims Act has recently been undermined by court decisions which limit the scope of the law and, in some cases, allow subcontractors paid with Government money to escape responsibility for proven frauds." S. Rep. No. 110-10 at 4 (2009). The bill addresses these concerns by, first, legislatively overruling the Supreme Court's 2008 decision in Allison Engine Co. v. United States ex rel. Sanders, 128 S. Ct. 2123, 2128 (2008), which required proof that a defendant "intend[ed] that the Government itself pay the claim'' in order for liability to attach under § 3729(a)(2) & (3) of the FCA. See Supreme Court Resolves Circuit Split Over Presentment Requirement of the False Claims Act (June 2008) www.wileyrein.com/fca. The bill eliminates the statutory text upon which the Allison Engine Court relied to reach its decision. Instead, liability would attach under the bill whenever one "knowingly makes, uses, or causes to be made or used, a false record or statement material to a false or fraudulent claim." S. 386 § 4 (a)(1)(B) (emphasis added). The term "material," in turn, is now defined to mean "having a natural tendency to influence, or be capable of influencing, the payment or receipt of money or property." Id. § 4 (b)(4) As a result, a violation of the FCA would occur whenever a person makes a false statement that has the natural tendency to influence the Government's decision to pay a claim, regardless of whether the person intends the statement to result in the payment of a claim by the Government. This particular amendment to the False Claims Act is retroactive to June 2008, which coincides with the timing of the Allison Engine decision.
Second, the legislation repudiates the line of cases following United States ex rel. Totten v. Bombardier Corp., 380 F.3d 488 (D.C. Cir. 2004), as well as the Eastern District of Virginia's decision in United States ex rel. DRC, Inc. v. Custer Battles, LLC, 376 F. Supp. 2d 617 (E.D. Va. 2005), rev'd, 562 F.3d 295 (4th Cir. 2009). See Fourth Circuit Holds Contractor Liable for False Claims Submitted to the Coalition Provisional Authority in Iraq (April 2009) www.wileyrein.com/iraq_false_claims. Totten held that a claim must be ''presented to an officer or employee of the Government before liability can attach,'' while Custer Battles held that the FCA does not reach a claim for payment of funds over which the United States has neither title nor control. The bill redefines the term "claim" to include "any request or demand, whether under a contract or otherwise, for money or property and whether or not the United States has title to the money or property." The revised definition of "claim" also includes any request or demand presented to the United States or "made to a contractor, grantee, or other recipient" if (1) "the money . . . is to be spent or used on the Government's behalf or to advance a Government program or interest" and (2) the United States provides the money requested or will reimburse the entity from which the money was requested.
If enacted into law, this bill would significantly broaden the reach of the FCA, and could require contractors to make substantial revisions to their compliance programs.