Most government contractors in the construction industry are well aware that by providing goods or services to government-funded construction projects, they are potentially subject to liability under the False Claims Act. Like most federal anticorruption legislation, the False Claims Act contains criminal and civil enforcement provisions. Under the civil portion of the False Claims Act, sanctions are imposed for those who knowingly submit, or cause another person or entity to submit, false claims for payment of government funds. A contractor in violation of the False Claims Act could be liable for three times the government’s damages, along with hefty civil penalties. For each of the past four years, the U.S. Department of Justice has recovered over $3.5 billion under the False Claims Act.
The Supreme Court of the United States increased exposure under the False Claims Act on June 16, 2016, when it issued a unanimous decision in Universal Health Services, Inc. v. United States ex rel. Escobar, finding that an implied false certification “can be a basis for liability” under the False Claims Act. The Court noted two preconditions for finding such liability:
- The claim must not merely request payment; it must also make specific representations about the goods or services provided; and
- The contractor’s “failure to disclose noncompliance with material statutory, regulatory, or contractual requirements” necessarily results in “misleading half-truths.”
The court found that every submission of a claim for payment implicitly represents that the claimant is legally entitled to payment, and that failing to disclose violations of material legal requirements renders the claim misleading.
For construction contractors, this means that your representations in the bidding process, submissions for payment, or even submissions of compliance may be treated as an implied certification that you have complied fully with all applicable laws, regulations, and contract terms. In other words, if you are later found to have violated the False Claims Act, but had not disclosed as much, it may constitute a misrepresentation in violation of the act.
In order to constitute a misrepresentation, the undisclosed violation must be material and knowing, though. While future court decisions will clarify the “materiality” and “knowingly” requirements for implied false certification, it appears that contractors will face a higher risk of liability post-Escobar when doing business with the government. Therefore, contractors may want to be more diligent and aware when complying with statutory, regulatory, or contract terms that appear material, and in verifying compliance of labor qualifications or materials supplied by subcontractors and suppliers for any government-sponsored project. For contractors in the construction industry, this would likely include:
- authentication of minority-owned, woman-owned, and disadvantaged business enterprise participation rates;
- validation of substandard or agreed-upon materials;
- verification of hours charged to the project;
- attestation to the labor qualifications of subcontractors and suppliers, as well as verification of the materials supplied by subcontractors and suppliers; and
- compliance with applicable federal statutes and regulations, including the Davis-Bacon Act of 1931 and Occupational Safety and Health Administration requirements