U.S. Supreme Court Narrows the Scope of the False Claims Act

June 11, 2008

On June 9, 2008, the U.S. Supreme Court issued a unanimous opinion in Allison Engine Co. v. United States ex rel. Sanders that significantly narrowed the scope of the False Claims Act. The Court held that liability may not be imposed under Sections 3729(a)(2) and 3729(a)(3) of the False Claims Act based on fraud directed against private entities that receive federal funding. Liability attaches under those sections, the Court concluded, only where the defendant “intend[s] that [a] false record or statement be material to the Government’s decision to pay or approve [a] false claim.” 

The case was filed under the False Claims Act’s qui tam provision, which enables private parties to bring suit on behalf of the federal government and recover a portion of the proceeds if they succeed in proving that the defendant defrauded the federal government. The plaintiffs alleged that Allison Engine and several other subcontractors had defrauded the government by submitting fraudulent claims to a prime contractor for work they had completed on a project for the U.S. Navy. The district court granted a directed verdict to Allison Engine and its co-defendants because there was no evidence that the allegedly false claims had ever been submitted to the federal government for payment or approval.

In the decision under review, the Sixth Circuit reversed the district court’s entry of a directed verdict and held that Sections 3729(a)(2) and 3729(a)(3) of the False Claims Act extend to fraud directed against any private entity that receives federal funding. Under the Sixth Circuit’s reasoning, the statute’s onerous treble-damages penalties would have applied whenever a defendant made a false claim that was paid with funds derived from the government, including when a contractor made a claim to a higher-tier contractor on a government project, or to a university or other recipient of federal funds. 

The Supreme Court unanimously rejected the Sixth Circuit’s expansive reading of the False Claims Act. In an opinion authored by Justice Alito, the Court held that, under Sections 3729(a)(2) and 3729(a)(3) of the False Claims Act, “it is . . . necessary for the defendant to intend that a claim be paid . . . by the Government and not by another entity.” The Court explained that a subcontractor on a government project “violates §3729(a)(2) if the subcontractor submits a false statement to the prime contractor intending for the statement to be used by the prime contractor to get the Government to pay its claim.” On the other hand, “[i]f a subcontractor or another defendant makes a false statement to a private entity and does not intend the Government to rely on that false statement as a condition of payment, the statement is not made with the purpose of inducing payment of a false claim ‘by the Government’” and thus does not give rise to liability under the False Claims Act. 

Accordingly, a plaintiff may not recover under Section 3729(a)(2) or Section 3729(a)(3) where the defendant allegedly intended to defraud a federally funded private entity, rather than the federal government itself. The False Claims Act is not “an all-purpose antifraud statute,” the Court emphasized, but instead a specialized statute designed to “combat[ ] fraud against the Government.” 

Gibson Dunn’s Theodore B. Olson, Raymond B. Ludwiszewski, Matthew D. McGill, and Amir C. Tayrani briefed the case on behalf of Allison Engine. Theodore B. Olson presented oral argument in the Supreme Court.

Gibson, Dunn & Crutcher’s Appellate and Constitutional Law Practice Group is available to assist with any questions you may have regarding these issues. For further information, please contact the Gibson Dunn attorney with whom you work or Theodore B. Olson (202-955-8668, [email protected]), Raymond B. Ludwiszewski (202-955-8665, [email protected]), Matthew D. McGill (202-887-3680, [email protected]), or Amir C. Tayrani (202-887-3692, [email protected]) in the firm’s Washington, D.C. office, or any of the following attorneys:
Theodore J. Boutrous, Jr. – Los Angeles (213-229-7804, [email protected]) 
Daniel M. Kolkey – San Francisco (415-393-8240, [email protected])
Miguel A. Estrada – Washington, D.C. (202-955-8257, [email protected])