On May 20, 2009, President Obama signed into law the Fraud Enforcement and Recovery Act of 2009 (“FERA”). FERA greatly expands the pool of potential defendants under the False Claims Act. The False Claims Act, 31 U.S.C. §§ 3729–3733, is a federal statute that allows the federal government, as well as whistleblowers suing on behalf of the federal government, to seek recovery of federal funds lost to fraud. False Claims Act liability is quite potent as it includes:
- treble damages;
- civil penalties of $5,500 to $11,000 for each false claim;
- attorney’s fees; and
- potential debarment from future federal contracts and grants.
Under FERA’s amendments to the False Claims Act, businesses that contract with other institutions that, in turn, receive funds from the federal government are now subject to False Claims Act liability. Such potential defendants fall into two broad categories: subcontractors that work for government contractors and contractors that work for federal-grant recipients.
FERA thus legislatively overturns two court decisions that significantly limited liability under the False Claims Act: Allison Engine Co. v. United States ex rel. Sanders, 128 S. Ct. 2123 (2008) and United States ex rel. Totten v. Bombardier Corp., 380 F.3d 488 (D.C. Cir. 2004). In so doing, FERA effectively eliminates the “presentment” requirement that a false claim be submitted directly to a representative of the federal government. In Allison Engine, a whistleblower brought suit under the False Claims Act, alleging that his former employer had submitted fraudulent invoices to shipyards that were building destroyers for the United States Navy. The shipyards, under contract with the United States Navy, paid these fraudulent invoices with federal funds.
The district court granted the defendant’s motion for judgment as a matter of law, concluding that False Claims Act liability could not lie because false claims were not presented directly to the federal government. The United States Supreme Court vacated the Sixth Circuit’s reversal of the district court. In a unanimous opinion written by Justice Alito, the Allison Engine Court held that for False Claims Act liability to lie, “a defendant must intend that the Government itself pay the claim.” Otherwise, the False Claims Act would be “transform[ed] ... into an all-purpose antifraud statute.” In reversing Allison Engine, FERA provides that a subcontractor who knowingly submits false claims to a government contractor and is paid with federal funds is now liable under the False Claims Act.
FERA also overturns Totten, where the D.C. Circuit (in an opinion written by then-Circuit Judge John Roberts) held that False Claims Act liability would not lie for false claims presented to recipients of federal grants. The timing of FERA’s legislative reversal of Totten is significant, because the federal government has recently obligated over a trillion dollars to stabilize and rebuild the United States economy. The federal government is distributing a large share of these funds through grants. While it is hoped these grants will save many businesses from collapse, these grants can also endanger ill-advised organizations that render questionable services provided indirectly to the federal government or paid for by the federal government. As the Totten Court noted, such businesses abound: “for example, liability could attach for any false claim made to any college or university, so long as the institution has received some federal grants—as most of them do.” Thus, organizations that neither contract with the federal government nor receive funds from the federal government must now guard against liability under the False Claims Act.
The FERA provisions that widen False Claims Act liability take effect as if enacted on June 7, 2008 (two days before the Supreme Court decided Allison Engine) and apply to all False Claims Act cases that are pending on or after that date. Some commentators have predicted that this effective date is almost certain to be challenged as violating the constitutional prohibition on ex post facto laws (laws that retroactively criminalize an action that was legal at the time it was committed). Although the False Claims Act is not a criminal statute, the Supreme Court has recognized that it is “essentially punitive.” The punitive nature of the False Claims Act may render unconstitutional the imposition of retroactive False Claims Act liability.
FERA also expands False Claims Act liability to include the knowing retention of an overpayment from the government. Hence forward, knowingly concealing or knowingly and improperly avoiding or decreasing an obligation owed to the government will expose an entity to the same liability as have false claims for payment. In the wake of FERA, all organizations that receive federal funds—directly or indirectly, through a government contractor or through a federal-grant recipient—would be well advised to institute a robust compliance program. A well-designed compliance program will prevent many violations of the False Claims Act. Moreover, even if violations do occur, a well-designed compliance program often will detect them early, and will allow the organization to address the violations promptly and long before they become the subject of litigation.
Click here to view the full text of FERA.