Effective tomorrow, December 12, 2008, government contractors must implement a new mandatory disclosure requirement under the Federal Acquisition Regulation ("FAR") that is triggered whenever they have "credible evidence" of a False Claims Act violation. The final rule on this change from voluntary to mandatory disclosure recognizes that it is a "sea change" and a "major departure" from existing law and practice. Unfortunately, the new FAR requirement does not provide a clear definition of the "credible evidence" standard, which is not limited to a subjective belief, but apparently is also measured according to an objective test requiring reasonable steps to be taken in assessing the underlying issues. While this new standard, despite its lack of clarity, may not be difficult to apply in cases of criminal law violations and significant overpayments, the hasty addition of FCA violations to the mandatory disclosure rule extends the duty to report well beyond what is required for the other violations. The maze of unsettled legal issues and conflicting standards that have arisen under the FCA's unique liability provisions, enforced by both private qui tam relators and the government, present nearly impossible challenges to companies and individuals required to deal with this area of law. As discussed below, the only real defense a company has to demonstrate compliance with this new FAR provision is to: (1) conduct an internal investigation on virtually every allegation; (2) make a good faith decision on the "credible evidence" standard; and then—most importantly (3) carefully document their investigation and decision-making process in the event that suspension or debarment proceedings are commenced based on the failure to disclose the FCA violation.  

Background on the Final Rule  

The FAR's mandatory disclosure requirement is part of a final rule agreed upon by the Civilian Agency Acquisition Council and the Defense Acquisition Council ("Councils") and issued on November 12, 2008. See 73 Fed. Reg. 67064 (Nov. 12, 2008). The final rule imposes increased compliance and disclosure obligations on contractors and subcontractors, and implements the Close the Contractor Fraud Loophole Act enacted in 2008 that directed the elimination of certain exemptions in the rule as initially proposed. See Pub. L. No. 110-252, Title VI, Chapter 1.

The Criminal Division of the Department of Justice requested the elimination of exemptions from the mandatory disclosure provision for commercial acquisitions and contracts performed outside the United States, and it outlined a mandatory disclosure provision covering criminal law violations and overpayments in connection with covered contracts. See Letter from Alice Fisher, Assistant Attorney General, DOJ Criminal Division to Paul Denett, Administrator of OMB's Office of Federal Procurement Policy (May 23, 2007) ("DOJ's May 23, 2007 Letter"). The final rule incorporates these suggestions, and in addition, it includes FCA violations in the mandatory disclosure provision.  

Summary of Mandatory Disclosure Provision  

Under the mandatory disclosure provision, a government contractor must make a timely disclosure to the agency OIG and the contracting officer whenever the contractor has "credible evidence" of: (1) a violation of the federal criminal law involving fraud, conflict of interest, bribery, or gratuity violations; (2) a "significant overpayment" as defined in the FAR; or (3) a violation of the FCA in a covered federal contract. The contractor's duty to disclose flows to the conduct of the contractor's principal, employee, agent or subcontractor. Failure to timely disclose the conduct in connection with the award, performance, or closeout of a covered contract violates contracts executed after December 12, 2008, and is cause for suspension and debarment even for contracts executed prior to December 12, 2008.  

All government contractors are subject to the mandatory disclosure requirement in the FAR amendment. This includes not only major defense contractors, but virtually every commercial products or service company with Federal sales, as well as healthcare and pharmaceutical providers that have contracts covered by the FAR to provide healthcare services under Tricare and the Federal Employees Health Benefits Program. Even small businesses (defined by the amendment as contracts that do not involve $5 million or more than 120 days in duration) are subject to the mandatory disclosure requirements, but they do not need to implement the amendment's compliance and internal control program requirements.  

Determining Whether There is "Credible Evidence" of an FCA Violation  

In the preamble to the final rule, the Councils explained that the "credible evidence" of an FCA violation standard replaced the "reasonable grounds to believe" standard in the proposed rule in order to indicate a "higher standard" that implies that contractors will "take some time for preliminary examination of the evidence to determine its credibility before deciding to disclose to the Government." This opportunity to take time may sound comforting at first, but contractors are responsible for determining whether there have been FCA violations. This rule provides no assistance or standard to allow contractors to resolve the complex legal issues in disputed areas where conflicting legal standards apply. For example, while every circuit to address the issue has found that there is a materiality requirement implicit in an FCA violation, a conflict among the circuits exists on which materiality standard to use as well as how to apply it. See John T. Boese, Civil False Claims and Qui Tam Actions, § 2.04 (3d ed. 2006 & Supp. 2009-1).  

Thus, establishing whether or not there is an FCA violation involves determining whether the violation is either a prerequisite to the government's payment decision, or capable of influencing that decision. Depending upon their interpretation, courts apply these standards more strictly in some decisions than in others. See, e.g., United States ex rel. Harrison v. Westinghouse Savannah River Co., 352 F.3d 908 (4th Cir. 2003) (applying the "capable of influencing" standard broadly); United States ex rel. Berge v. Board of Trustees of University of Alabama, 104 F.3d 1453 (4th Cir. 1997) (applying the "capable of influencing" standard strictly). In some jurisdictions, both standards have been applied, see, e.g., United States v. Rogan, 459 F. Supp. 2d 692 (N. D. Ill. 2006), aff'd, United States v. Rogan, 517 F.3d 449 (7th Cir. 2008), even within the same decision, see United States ex rel. Hendow v. University of Phoenix, 461 F.3d 1166 (9th Cir. 2006). How is a contractor to determine which standard applies, as well as how "material" a regulatory or statutory violation is to the agency's payment decision? In establishing the mandatory duty to disclose FCA violations under the FAR, the Councils did not address this materiality issue at all.  

The Justice Department itself, however, recognized the importance of the materiality requirement in its outline of the recommended language for the FAR amendment in the context of contractors' duty to notify the government of overpayments. In its letter to the Office of Federal Procurement Policy, DOJ emphasized:  

To limit the scope of this provision, it may be necessary to include a materiality requirement.  

See DOJ's May 23, 2007, Letter (Attachment, at 2a) (emphasis in original). In response to DOJ's request, the FAR amendment specifically limits the duty to disclose overpayments to those that are "significant," but there are no comparable explicit limits on the duty to disclose FCA violations in the FAR provision.  

The "Credible Evidence" Standard is Both a Subjective and an Objective Standard  

The preamble states that the "credible evidence" standard imposes the obligation "to take reasonable steps that the contractor considers sufficient to determine that the evidence is credible," but this does not answer the valid concerns raised about the difficulty in discerning what constitutes a violation of the FCA and when the duty to disclose FCA violations would be triggered. Thus, even though Justice Department attorneys expert in FCA issues may take years to investigate allegations before deciding whether to intervene in qui tam suits, it is up to contractors to decide these issues on their own in a "timely" manner. Although timely disclosure in contracts that predate the rule change is limited to within three years of contract closeout, what is considered "timely" in contracts executed after the effective date of the amendment is not specified. And, while the contractor's belief in the sufficiency of its decision not to disclose a matter to the government may be enough to prevent adverse consequences, it may not protect contractors from suspension and debarment proceedings if the government believes that the company's action was not reasonable. Although the lack of discussion in the preamble about the issue signals the unlikelihood that debarment proceedings will be commenced for nondisclosure if no underlying FCA violation exists, there is no guarantee of that outcome under the rule.

Mere Filing of a Qui Tam Complaint is Insufficient under the "Credible Evidence" Standard

The following morsel of guidance on the "credible evidence" standard is provided in the final rule:

the mere filing of a qui tam action . . . is not sufficient to establish a violation under the statute, nor does it represent, standing alone, credible evidence of a violation.

This recognizes that qui tam complaints are not "credible evidence" of FCA violations, and that the duty to disclose cannot be premised on the filing of such complaints alone. Something more is required to trigger the mandatory duty to disclose. On the other hand, many contractors may decide to disclose qui tam cases without making a "credible evidence" determination in order to avoid the argument by the qui tam relator that the disclosure under the FAR was itself an admission of liability. As a practical matter, the vague "credible evidence" standard will be costly, time-consuming, and difficult to apply, and thus gives cold comfort to contractors who are faced with conducting business under it.  

Best Practices for Contractors  

What will, and will not be sufficient under this new, poorly written and ill-considered FAR rule will develop over time. In the near term, contractors of all stripes faced with allegations of an FCA violation must:  

  1. Carefully investigate allegations of FCA violations;
  1. Carefully determine the facts and legal standards that apply, employing outside experts if appropriate; and, most importantly
  1. Document the steps taken to determine the facts and law, and the basis for the contractor's decision on disclosure.  

The suspension and debarment officials who will decide the contractor's fate are most influenced by a contractor's good faith and a well-documented decision-making process.