Do you receive grants from the U.S. Federal government? Do you know the extent of your liability under the False Claims Act?1  The False Claims Act (“FCA”) allows private individuals or "whistleblowers", with knowledge of fraud against the Federal Government, to sue on behalf of the Government to recover civil penalties and triple damages.  A fraudulent or false claim occurs when a recipient of federal funding seeks payment based upon information that is false, fictitious or fraudulent.

Recently, in a case of “first impression,” the United States Court of Appeals for the Second Circuit held that, in FCA cases where there the Government receives no tangible benefit from its funding, the amount of FCA damages may be based upon the entire amount paid by the government to a grantee or contractor.2  This is a significant departure from the more traditional FCA case law involving Government contracts.  Traditionally, the calculation of FCA damages is relatively straightforward:  take the difference between “the amount the government actual paid and the value of the goods or services the actually government received or used”  to determine the damages and then multiply "three times the amount of damages which the Government sustains because of the act of that person” in addition to a “civil penalty.” 3

The background of this case is important to understand the impact that the decision will have on organizations seeking government grant funding.  In 1997, Cornell University Medical College applied for a grant program awarded by the National Institutes of Health (“NIH”). Cornell submitted a 123-page grant application for a fellowship program entitled “Neuropsychology of HIV/AIDS Fellowship.” NIH awarded the grant to Cornell. Cornell subsequently received funding for two fiscal years and was granted renewals for the following four years.  A grant is an award of financial assistance by the Federal Government for the purpose of carrying out a public purpose, here research involving the neuropsychology of HIV/AIDS. A grant is different from a procurement contract because a contract is used to acquire goods or services for the Government’s direct use or benefit.

In 2003, a former fellow in the program filed a FCA qui tam (or whistleblower) suit against Cornell alleging that Cornell had made false claims to the Government in its grant application as well as in each of its annual renewal applications. The case went to a jury trial in July 2010 and the jury found that Cornell had made false statements in the final three renewal applications.

Shortly thereafter, the United States District Court assessed damages against Cornell in the amount of $1,519,596.25:  actual treble damages for the final three years of the grant totaled $855,714; attorney’s fees, costs, and expenses totaled $631,882.25. So, for receipts of $285,239 in annual grant funding for 3 years, Cornell was ordered to pay $1,519,596.25.  Cornell, not surprisingly, appealed the District Court’s damages award, arguing that the amount was calculated incorrectly by the court, no doubt believing that the damages assessment should be calculated much like FCA contract damages. 

But what if the Government funding wasn’t used to purchase an actual item or service? What if the dispute isn’t about whether services paid for were delivered or were even necessary?  In other words, if there is no procurement contract and no purchase of goods/services, then what is the tangible benefit to the Government when it funds a grant for a public purpose?  In other words, how are FCA damages to be calculated? 

The Second Circuit answered this question succinctly:  if the government grants funds for a specific program, and the grantee substitutes nonconforming services, the damages will be the “full amount of the grant payments made by the government after the material false statements were made.” In essence:  you lie (or misrepresent), you repay everything, three times over plus fees and costs.

Although qui tam suits have existed since 1863, whistleblower suits against grantees have been relatively uncommon. It remains to be seen whether this decision will present new fertile fields for whistleblowers to challenge what were once mistakes in grant applications as fraud under the FCA or whether this case will remain an isolated outlier.  Only time will tell, but grantees should take steps to ensure that their organizations are not subjected to qui tam suits in the future.

Principally, grantees should take a new look at how they can guarantee that the promises they make in their grant proposals - and renewal applications - will actually be fulfilled once the funding is received. Applications for renewal must not be pro forma. While organizations may balk at expending resources to make certain their programs are performed in accordance with their grants and grant proposals, failure to do so may be costly. For the defendants in this case, that mistake cost them over $1.5m.

To see the text of the actual decision, click here.