On May 20, 2009, President Obama signed into law significant changes to the False Claims Act, 31 U.S.C. § 3729 et seq. ("FCA"). The amendments will increase the liability exposure of every company that does business with the federal government and of every company that supplies goods or services that are reimbursed by federal government dollars. This update provides an overview of the changes brought about by the new law, which (among other things), legislatively overturns the Supreme Court's 9-0 ruling last term in Allison Engine Co., Inc. v. United States ex rel. Sanders, 128 S.Ct. 2123 (2008). (For an overview of key FCA trends, see our 2008 year-end report on the FCA.)
Our February 26, 2009 Client Alert discussed two bills that Senator Grassley introduced to modify the False Claims Act. Many of Senator Grassley's proposed amendments were incorporated into a larger anti-fraud measure, the Fraud Enforcement and Recovery Act of 2009 ("FERA"), which President Obama signed into law on May 20.
Most press reports covering FERA have highlighted its primary purpose--to enable and fund investigations and prosecutions of financial fraud. But in Section 4, FERA substantially broadened the FCA, and its enlarged scope will undoubtedly lead to increased qui tam lawsuits and enforcement activity.
Section 4 of FERA amends the FCA in several fundamental ways.
1. FERA Overrules Allison Engine and modifies the intent requirement for Section 3729(a)(2) claims.
In Allison Engine, the Supreme Court held that Sections 3729(a)(2) and 3729(a)(3) of the FCA apply only to fraud directed against the federal government and not to frauds that subcontractors may commit against prime contractors working on projects funded with federal dollars. The Court held that a defendant must "intend that a claim be paid ... by the Government and not by another entity."
FERA legislatively overrules Allison Engine and imposes FCA liability even if the company that submitted a false claim to a non-government entity did not specifically intend to defraud the government. Notably, FERA also contains a section making certain provisions retroactive to June 7, 2008--the date Allison Engine was decided. Litigation will no doubt ensue over the constitutionality of this retroactivity provision.
2. FERA overrules Totten and significantly expands the definition of a "claim."
The FCA now extends to any false or fraudulent claim for government money or property, whether or not the claim is presented to a government official or employee, and whether or not the U.S. Government has title to, or physical custody of, the money or property.
This is a significant change. The FCA previously penalized any person who "knowingly presents, or causes to be presented, to an officer or employee of the United States Government or a member of the Armed Forces of the United States a false or fraudulent claim for payment or approval," 31 U.S.C. § 3729(a)(1) (emphasis added). FERA eliminates what had been called the "presentment" requirement and effectively overrules a D.C. Circuit decision (authored by then Judge John Roberts) in United States ex rel. Totten v. Bombardier Corp., 380 F.3d 488 (D.C. Cir. 2004). Totten held that the FCA did not apply to a suit alleging fraud against Amtrak, because even though Amtrak was a recipient of federal dollars, the underlying false statements were submitted to Amtrak, and not the federal government. By contrast, FERA would appear to apply to any fraud committed against any federal grantee.
FERA also amends the definition of "claim" in a significant way. The new definition of a "claim" is:
(A) any request or demand, whether under a contract or otherwise, for money or property and whether or not the United States has title to the money or property, that--
(i) is presented to an officer, employee, or agent of the United States; or
(ii) is made to a contractor, grantee, or other recipient, if the money or property is to be spent or used on the Government's behalf or to advance a Government program or interest, and if the United States Government--
(I) provides or has provided any portion of the money or property requested or demanded; or
(II) will reimburse such contractor, grantee, or other recipient for any portion of the money or property which is requested or demanded; …
The implications of this change are profound. FCA liability will now apparently be triggered by any false claim made to any recipient of federal money so long as that money is used to "advance a Government program or interest"--a phrase that is not defined under the amendments. FCA relators (and the Department of Justice) will certainly push to give this provision the broadest possible interpretation.
3. FERA applies to retention of government "overpayments."
The old FCA penalized any person who "knowingly makes, uses, or causes to be made or used, a false record or statement to conceal, avoid, or decrease an obligation to pay or transmit money or property to the Government." 31 U.S.C. § 3729(a)(7). FERA now defines "obligation" to include "the retention of any overpayment." This opens up new avenues of exposure against federal contractors or grantees for knowingly retaining government "overpayments."
4. FERA provides that government claims "relate back" to the time of filing the original qui tam action for statute of limitations purposes.
FERA provides that when the government intervenes in a qui tam case it can expand the relator’s allegations and include new substantive claims, and it deems these amendments to "relate back" to the filing date of the original qui tam complaint for statute of limitations purposes. As a practical matter, the "relation-back" provision may operate to extend the statute of limitations in FCA suits.
5. FERA expands whistleblower protections.
Previously, the FCA afforded protection to "any employee who is discharged, demoted, suspended, threatened, harassed, or in any other manner discriminated against in the terms and conditions of employment by his or her employer because of lawful acts done by the employee on behalf of the employee . . . ." 31 U.S.C. § 3730(h) (emphasis added). FERA extends whistleblower protections beyond "employees" to a "contractor or agent" and no longer requires that any prohibited retaliatory action be taken by an employer. Under FERA, Section 3730(h) now reads, "any employee, contractor, or agent shall be entitled to all relief necessary to make that employee, contractor, or agent whole, if that employee, contractor, or agent is discharged, demoted, suspended, threatened, harassed, or in any other manner discriminated against in the terms and conditions of employment …."
6. FERA permits greater sharing of materials during the seal period following the filing of qui tam complaints.
Qui tam complaints are filed under seal for at least sixty days. 31 U.S.C. § 3730(b)(2). Under FERA, relators and the federal government may now share information during the seal period with State and Local governments: "a seal on the action ordered by the court under section 3730(b) shall not preclude the Government or the person bringing the action from serving the complaint, any other pleadings, or the written disclosure of substantially all material evidence and information possessed by the person bringing the action on the law enforcement authorities that are authorized under the law of that State or local government to investigate and prosecute such actions on behalf of such governments."
7. FERA permits the Attorney General to share information with relators and to delegate CID authority.
FERA expressly authorizes the Attorney General to share information obtained through Civil Investigative Demands with qui tam relators if this disclosure is "necessary as part of any false claims act investigation." It also authorizes the Attorney General to delegate the authority to issue CIDs to lower level officials in the Department of Justice.
* * *
These are sweeping and significant changes for the FCA. And, still pending in the House and Senate are the False Claims Clarification Acts of 2009 (S. 458 and H.R. 1788), which would expand the scope and reach of the FCA even further. The House Bill (H.R. 1788) was introduced on March 30, 2009, referred to committee, and reported out of the House Judiciary committee on April 28, 2009. The Senate bill (S. 458) was introduced on February 24, 2009 and referred to the committee on the judiciary. Gibson Dunn is monitoring this legislation closely.
Gibson, Dunn & Crutcher lawyers are available to assist in addressing any questions you may have regarding these issues. Gibson Dunn’s Appellate and Constitutional Law Practice Group has analyzed the new bill and the defenses available under the Act. Our attorneys have handled more than 100 FCA investigations and have a long track record of litigation success, including the 9-0 win in Allison Engine. The firm has more than 30 attorneys with substantive FCA expertise and 20 former Assistant U.S. Attorneys and DOJ attorneys. Please contact the Gibson Dunn attorney with whom you work, or any of the following:
F. Joseph Warin (202-887-3609, email@example.com)
Joseph West (202-955-8658, firstname.lastname@example.org)
Karen L. Manos (202-955-8536, email@example.com)
Andrew Tulumello (202-955-8657, firstname.lastname@example.org)
Matthew D. McGill (202-887-3680 , email@example.com)
Randy Mastro (212-351-3825, firstname.lastname@example.org)
James A. Walden (212-351-2300, email@example.com)
Robert C. Blume (303-298-5758, firstname.lastname@example.org)
Jessica H. Sanderson (303-298-5928, email@example.com)
Sean M. Royall (214-698-3256, firstname.lastname@example.org)
Evan S. Tilton (214-698-3156, email@example.com)
Nick Hanna (949-451-4270, firstname.lastname@example.org)
Timothy Hatch (213-229-7368, email@example.com)
© 2009 Gibson, Dunn & Crutcher LLP
Attorney Advertising: The enclosed materials have been prepared for general informational purposes only and are not intended as legal advice.