Most government contractors that do business with the federal government are familiar with the False Claims Act and the risks associated with it. But companies with public contracts with state governments face increasing potential liability under the growing catalog of state false claims acts, and those risks are further heightened by possible liability for implied false certifications.

Numerous states have adopted false claims acts in response to changes in federal Medicaid law, and 35 states plus the District of Columbia now have some form of a false claims act. Many state acts are based on the federal FCA, and so far at least one state (California) has followed federal precedent in recognizing liability for implied false certifications. This increased focus by states on false claims and implied false certification presents new and evolving risks that contractors doing business with states should consider and address in their internal compliance programs.

Government contractors operating in the federal environment have long been aware that they may face liability under the federal FCA for knowingly making false statements in connection with false or fraudulent claims. More recently, the concern over federal FCA liability has been extended to implied false certifications, as numerous federal courts have recognized that contractors may make implicit certifications of compliance with statutes, regulations and contract provisions when seeking payment from the federal government.

For example, in United States v. Science Applications International, 626 F.3d 1257 (D.C. Cir. 2010), the D.C. Circuit endorsed the implied certification theory, thereby broadening the scope of potential liability under the FCA. Even though SAIC's invoices to the federal government were not false on their face and included no express false certifications, the court held that the invoices were implied certifications that the contractor complied with all material contractual requirements, and that SAIC's noncompliance with a conflict of interest requirement rendered each invoice false.

For contractors with state contracts, false claims liability is an increasing risk as the list of states with false claims acts grows. The federal Deficit Reduction Act of 2005 accelerated the adoption of state false claims acts by including a provision for a 10-percent increase in a state's share of recoveries in Medicaid FCA cases if the state enacts a false claims act comparable to the federal act. Sixteen state false claims acts apply the restrictions only to Medicaid cases, and many were passed expressly to take advantage of the Deficit Reduction Act's increased FCA recovery share.

State false claims acts vary substantively; for example, most, but not all, of the enacted state acts include a qui tam provision similar to that found in the federal FCA, allowing private individuals to file whistleblower actions on behalf of the government and to share in false claims act recoveries.

The Deficit Reduction Act helped standardize some of the provisions across states, and, more than ever, many of the state false claims act resemble the federal one. For a state false claims act to qualify for increased Medicaid FCA case recovery, the Deficit Reduction Act requires that the state law establish [1] federal FCA-type liability for false and fraudulent claims related to Medicaid;[2] provisions for facilitating and rewarding qui tam relators comparable to those in the federal FCA;[3] a requirement for filing an action under seal for 60 days with review by the state's attorney general;[4] and civil penalties (including treble damages) not less than those in the federal FCA. With many states adopting these federal standards in their FCAs, it is unsurprising that state courts have shown a willingness to look at federal FCA case law as persuasive authority when ruling on state false claims act actions.

For instance, in San Francisco Unified School Dist. ex rel. Contreras v. Laidlaw Transit Inc., 182 Cal. App. 4th 438 (Cal. App. 1st Dist. 2010), a California appeals court endorsed the implied certification theory under the California False Claims Act. The qui tam plaintiffs in the case alleged that the contractor under the school's busing contract submitted claims for payments despite the contractor's knowledge that it had breached contract provisions related to bus maintenance and safety.

Citing exclusively federal decisions upholding the implied certification theory of liability, including decisions from the Tenth Circuit and the Court of Federal Claims, the California court held that the contractor's payment requests, if proven false and fraudulent, could be actionable under the California FCA.

An Illinois appeals court indirectly addressed implied certification in State ex rel. Beeler, Schad & Diamond PC v. Ritz Camera Ctrs. Inc., 377 Ill. App. 3d 990 (Ill. App. Ct. 1st Dist. 2007). In a certified appeal of a case concerning whether unpaid use taxes could constitute a false claim, the appeals court was asked to address whether an actual record or statement was necessary to constitute a false claim.

The state alleged that a retailer failed to maintain tax records as required by statute, and that intentional concealment of material facts was a false statement. The court ruled that an actual document or record was necessary to establish a false statement, citing federal case law from the Sixth Circuit and Southern District of Ohio. The court expressly declined to decide whether concealment or omission of material facts constituted a false claim.

State false claims act suits brought on the basis of implied certification have yet to spread widely, and it is uncertain whether even California courts will fully adopt implied certification, as the Supreme Court of California has yet to rule on this issue. But the proliferation of state false claims acts and the reliance of state courts on federal case law should make implied certification a growing concern for contractors with business in state government markets.

To limit potential state false claims act liability and as a matter of sound business policy, companies marketing to both the federal and state sectors would be well advised to apply the same robust contractual and statutory compliance protocols used in their federal contracts to their state contracts.