One of the more startling trends in defense contracting is the recent rise in payments made by industry to government agencies and whistleblowers under the False Claims Act. The Department of Justice recorded $890 million in 2013 based on procurement fraud claims under the FCA — primarily involving defense contractors.
Out-of-court payments typically ranged from $1 million to $5 million, and contractors often paid the settlements even though the government could not demonstrate a specific intent to defraud the government.
Why would contractors pay seven-figure settlements instead of fighting the FCA claims in court? The answer may be fear of what could happen in court. Last year, a federal judge ordered a contractor to pay a record $664 million after finding the contractor had violated the FCA in bidding and performing on an Air Force contract.
What is the FCA, and how can defense contractors mitigate its risks? The act imposes civil liability for using false information to seek payment from the government. This means that agencies can file a lawsuit and seek monetary damages from private parties who violate the act.
To find liability, a court must determine that the violator knew that the claim was false, maintained deliberate ignorance of the falsity or demonstrated a reckless disregard for the truth. Thus, courts have considerable latitude to find a party liable even if a contractor’s principals had no actual knowledge of the false claim.
If a court finds FCA violations, the penalties can be severe. The government may recover damages three times as great as its actual loss, plus civil penalties of up to $11,000 per claim. Between 1987 and 2012, it recovered nearly $35 billion under the FCA.
One unique feature of the FCA is the empowering of non-government actors to file complaints on the government’s behalf. It rewards private whistleblowers up to 30 percent of damages the government recovers, if the whistleblower files a complaint alleging violations not previously made public. These private whistleblower actions, brought for the government’s benefit, are known as qui tam cases — which in Latin refers to English monarchs who rewarded private citizens for enforcing the king’s laws.
More than 70 percent of all federal government FCA actions are qui tam cases. Given that successful whistleblower actions entitle the whistleblower to a sizable percentage of the government’s recovery, the FCA incentivizes contractor employees to file lawsuits instead of reporting problems directly to their employer. But whether motivated by personal financial gain, by anger against their employer or by a sincere sense of duty to taxpayers, whistleblowers have filed a record number of FCA complaints in federal court over the past year. Many plaintiffs’ attorneys have seized the opportunity, eagerly representing whistleblowers in exchange for a percentage of their client’s financial award.
These whistleblowers typically file the initial complaint with a federal court under seal, thereby concealing their filings from the public. This allows the government time to conduct its own investigation and determine whether it wishes to participate in the FCA action. Meanwhile, the contractor may not even know that it stands accused of fraud.
After its initial investigation, the government may choose to participate in the whistleblower’s complaint — meaning that the whistleblower stands to gain between 15 to 25 percent of the final recovery. If the government declines to participate, the whistleblower still may pursue the claim alone. In acting without government assistance, the whistleblower may recover up to 30 percent of any award to the government.
Defense contractors typically run afoul of the FCA through submission of invoices and certifications to their government customer. For example, recent violations stemmed from submission of costs, billing of contractor labor hours, certification of disadvantaged status, pre-sale testing of products and employee resumes submitted in proposals.
The resulting financial losses suffered by contractors oftentimes are compounded by government administrative actions such as termination of contracts for default and debarment.
The good news is that effective compliance and monitoring can significantly reduce the likelihood of FCA claims, as well as decrease the loss to the contractor if such claims do arise.
Defense contractors must include FCA risk mitigation as part of their operational processes and procedures. Fortunately, this overlaps with other compliance risks, such that it should be integrated into the contractor’s larger compliance with export controls, the Foreign Corrupt Practices Act and the Federal Acquisition Regulation’s ethics plan requirement.
At a minimum, any compliance program should include regular employee training, a code of conduct, emergency response plans for any suspected violations and mandatory reporting requirements for employees who observe potential violations. Effective compliance programs should also include an employee reporting system that allows for anonymity, as well as defined metrics for measuring compliance.
As contractors grow, compliance audits help analyze risk relative to the company’s government contracting activity. Like the compliance program, audits not only help to prevent violations but also demonstrate the contractor’s ongoing commitment to ethical business practices. This can go a long way in protecting the company from more severe scrutiny and penalties in the event of a government investigation.
If contractors suspect potential FCA liability, they should consider an internal investigation. This allows the company’s executives to review all relevant facts, analyze risk exposure and evaluate further courses of action. Using outside counsel for an internal investigation adds objectivity, legal expertise and oftentimes can prevent the investigation documents from being turned over to the government or whistleblower in a later lawsuit.
Finally, defense contractors who receive formal notice of a government investigation should contact outside counsel immediately. The initial communication with the government can help shape the substance and timing of the investigation, as well as influence the government’s decision on whether to intervene on behalf of the whistleblower.
With a record number of complaints filed and major awards annually to the government and whistleblowers, the FCA represents an increasingly potent weapon. Strong leadership, simple, executable compliance procedures, and constant vigilance all are required in order to counter risk exposure.
Chris Nagel is senior counsel in McGuireWoods’ government contracts litigation practice. The views expressed are solely the author’s.