History of the False Claims Act

In 1863 President Abraham Lincoln signed the False Claims Act into law. The FCA is applicable to contractors working on federal projects. One sponsor of recently proposed amendments to the FCA, Senator Dick Durbin, stated that the FCA was needed at that time “to prevent war profiteers and others from defrauding the government and the nation’s taxpayers.” Mr. Durbin added that the FCA was still needed today and needs to be strengthened in light of recent court decisions.

According to recent reports, the False Claims Act has saved approximately $20 billion since it was amended in 1986. Mr. Durbin added that, “there have been alarming reports of waste, fraud and abuse of government funds in the war and reconstruction effort, in the recovery from Hurricane Katrina and other disasters, in military and homeland security procurement contracts, and in federal healthcare programs.” The waste, fraud, and abuse of funds still occurs today making the FCA as important today as it was nearly 150 years ago.

What is a False Claim?

The FCA covers a broad group of actions that, if taken, could lead to penalties and damages amounting to more than three times the amount of the damages sustained by the United States Government. A person or company that takes any of the following actions is liable under the FCA.

  • States government a false or fraudulent claim for payment or approval.
  • Knowingly makes, uses, or causes to be made or used, a false record or statement to get a false or fraudulent claim paid or approved by the government.
  • Conspires to defraud the government by getting a false or fraudulent claim allowed or paid.
  • Has possession, custody, or control of property or money used, or to be used, by the government and, intending to defraud the government or willfully to conceal the property, delivers, or causes to be delivered, less property than the amount for which the person receives a certificate or receipt.
  • Authorized to make or deliver a document certifying receipt of property used, or to be used, by the government and, intending to defraud the The Federal False Claims Act and Contract Disputes Act— The Perils of Making False and Fraudulent Claims government, makes or delivers the receipt without completely knowing that the information on the receipt is true.

A “claim” is defined as “any request or demand, whether under a contract or otherwise, for money or property which is made to a contractor, grantee, or other recipient if the U.S. government provides any portion of the money or property which is requested or demanded, or if the government will reimburse such contractor, grantee, or other recipient for any portion of the money or property which is requested or demanded.”

The FCA specifies the time period within which a false claims action may be brought. The action must be initiated: 1) within six years of the date when the violation is committed; or 2) within three years after the date when facts material to the right of action are known, but in no event more than 10 years after the date on which the violation is committed.

A false claim action is often brought by individuals who risk everything to point out the fraudulent activities that waste tax dollars. These actions are initiated by government employees, or “whistleblowers,” who see the waste occurring and want to fix the problem. The FCA protects employees from any retaliation by requiring “reinstatement with the same seniority status such employee would have had but for the discrimination, two times the amount of back pay, interest on the back pay, and compensation for any special damages sustained as a result of the discrimination, including litigation costs and reasonable attorneys' fees.”

Contract Disputes Act

The Contract Disputes Act is another tool used by the federal government to prevent waste and fraud. The CDA includes a false claims provision that holds a contractor liable for the amount of the fraudulent claim submitted to the government.

If a contractor is unable to support any part of his claim and it is determined that such inability is attributable to misrepresentation of fact or fraud on the part of the contractor, he shall be liable to the government for an amount equal to such unsupported part of the claim in addition to all costs to the government attributable to the cost of reviewing said part of his claim. Liability under this subsection [section] shall be determined within six years of the commission of such misrepresentation of fact or fraud.

The FCA and CDA are each alone a significant deterrent to the filing of false claims. If both are implemented at the same time then a contractor can face a substantial amount of damages.

Now consider the various events that may occur on some federal construction projects. Bids may be submitted well below the estimate with no justification for a low bid. The contractor’s intent in some cases may be to make up the difference through equitable adjustments to the contract. Contractors may request payment for work that either was not completed or never will be completed. Contractors may falsely certify that subcontractors and material suppliers have been paid in order to receive payment from the government.

These actions, if taken, can cost the dishonest contractor a civil penalty of “not less than $5,000 and not more than $10,000, plus three times the amount of damages which the government sustains because of the act of that person.” Contractors working on projects funded by the U.S. government may have an incentive to check the accuracy of their “claim” before submitting it to the government for payment.

Case Study – Intentionally Inflated Claims

Contractors typically factor some amount of profit into their bid when they are bidding on a construction project. The profit is usually added to the actual cost to complete the project. After all, why would a contractor be in business if it wasn’t trying to make a buck?

There are, however, contractors who intentionally submit a deflated bid with the intent of submitting requests for equitable adjustment in order to make a profit. This was the case in Daewoo Engineering and Construction Co., Ltd. v. U.S., 73 Fed. Cl. 547. 

Daewoo submitted a bid on a project to build a 53- mile road around the tropical island of Palau in the North Pacific. The bid totaled $73 million while the next lowest bid was approximately $100 million. Daewoo was later permitted to increase its bid to $88 million after the government expressed concern over Daewoo’s “unusually low bid.”

Daewoo eventually submitted a certified claim of approximately $64 million in equitable adjustments. Daewoo later filed an action against the government to recover the amount of the claim.

According to the court, Daewoo claimed that the government’s Special Contracts Requirements Clause 1, Time Extensions for Unusually Severe Weather, was defective because it was not based on a relevant and available date. Daewoo also claimed that “the contract- provided method for embankment construction was defective as well, and the work was impossible to achieve within the time for performance.”

The problem for Daewoo, however, was that testimony and other evidence pointed to Daewoo’s executives trying to shift the risks of bad weather and alleged design deficiencies onto the government. Daewoo was apparently not capable of handling a project of that size with the management and workforce that it sent to Palau. In fact, Daewoo’s inefficiency was allegedly caused by Daewoo itself and not by the government.

Daewoo’s claims were denied. After the trial was underway and after Daewoo’s representatives had testified, the government sought to amend its answer to add fraud counterclaims under the FCA. It seems that the evidence of fraud arose during the testimony of Daewoo’s representatives.

Daewoo claimed that the contract clause regarding weather conditions was so misleading that the significant amounts of rain on the jobsite were a surprise. The court, however, did not agree when it noted that, “it rains an average of 150 inches per year in Palau.”

The contractor also certified and filed its claims before it engaged an expert. An expert was brought on board at a later date and, using a different method to calculate damages, reduced the amount of the certified claim by approximately $22 million. Daewoo, however, did not amend its claims or notify the government of this change in the claim amount. Daewoo’s claim was “submitted . . . as a negotiating ploy; that is, for a reason other than an attempt to recover money for which Daewoo believed the government is liable.”

Based on the number of claims submitted by Daewoo, the damages under the FCA may have totaled as much as $7,620,000 at $10,000 per claim. The court, however, declined to enter judgment based on multiple claims because the parties had not briefed or argued that issue. There was not enough evidence to prove that the U.S. suffered damages as a result of the false claims.

The judgment rendered against Daewoo under the FCA was $10,000. However, the total judgment against Daewoo was over $50 million. This was based on the damages awarded under the CDA.

The CDA was, according to the court, passed by Congress “in part to encourage bidders on government contracts to submit reasonable and responsible proposals in response to invitations to bid.” The court further noted, however, that “it may not be coincidence that [Daewoo] is seeking equitable adjustments in this litigation that approximate the amount by which Daewoo was able to undercut more careful bidders.” It was Daewoo’s apparent goal to submit a low bid to get the job and make money on the job through equitable adjustments. The strategy turned a possible gain into a $50 million loss.

What Can State and Local Public Owners Do?

Many states have their own version of a False Claims Act. Ohio currently does not. These laws can be powerful tools for public owners to use in defending against false and fraudulent claims.

Public owners are not at a complete loss if they don’t have these laws to assist them against fraud and waste. Public owners can add language to their contract documents to serve as a deterrent against unscrupulous contractors. Courts will generally allow parties to add provisions to their contracts as long as the provisions do not violate other laws and are reasonable.

A public owner should consider either adding false claims language to their contracts or referring to the FCA or CDA in their contracts. These provisions, at least on the federal level, have proven to recover billions of dollars that were not actually earned by government contractors.