Not Hard to Run Afoul of False Claims Act

Violating the False Claims Act may be easier than one thinks. It can be violated without any intent to lie to or to defraud the government.

Under the “reckless disregard” standard, a contractor can violate the act by not paying attention to the truth or dishonest information provided to the government in a manner that can be characterized as “reckless.”

“Reckless disregard” is not “deliberate,” but this invariably is a threshold inquiry whenever a government official finds the inaccuracy of information provided to be inexcusable. And reckless disregard can be found even in instances in which an attorney acts on behalf of the contractor in submitting a claim. Even though the claim is based on erroneous legal advice or mistakes made by the attorney, contractors nonetheless can suffer consequences.

A recent Court of Federal Claims decision reinforces this point and provides guidance on the reckless disregard standard and potential liability stemming from actions of an attorney.

In Gulf Group General Enterprises Co. v. United States, the court recently ruled that a military contractor had acted in reckless disregard when it failed to make a minimal examination of records that were submitted in support of a claim for payment from the government. Ironically, this case initially was brought by a contractor seeking money contractually owed, but resulted in a government counterclaim for violation of the FCA.

The contractor’s initial suit challenged termination of contracts for items such as dumpsters and latrines for military bases in Kuwait and sought damages for delays when the contractor was forced to travel in military convoys to deliver bottled water. The government counterclaimed, charging the contractor with submitting inflated invoices, which had all been reviewed, signed and submitted by the contractor’s attorney. They had also been signed by the contractor’s owner.

Several errors exposed the contractor to liability. First, it was working under a blanket purchase agreement (BPA) contract, under which the government issues “calls” — essentially task orders. The government terminated one of the calls, which precipitated the $10 million claim. This was the total value of the BPA. Therefore, apart from total disregard for the avoided costs of delivering on the entire agreement, the court found no evidence that would support a contractor expectation of all possible calls. Thus, in addition to wrongly assuming 100 percent profit on the $10 million dollar BPA, the contractor also inexplicably claimed a right to all calls, even though the contract vehicle allowed the government to order less than the maximum number. The court found that canceling a single call worth $1.4 million hardly constituted the entire $10 million BPA.

The contractor’s attorney testified that he had mistakenly believed in certifying the claim that the entire $10 million BPA had been cancelled. He further testified that he and the contractor honestly believed that the government would issue all of the calls up to the $10 million maximum, thereby entitling the contractor to the full amount. However, the attorney had no case law to support this novel argument.

Furthermore, in submitting the $10 million claim, the contractor also failed to account for payments of $3.1 million of work under the BPA. Lastly, the attorney conceded that the $10 million claim was merely a starting point for settlement negotiations. The court found these arguments so singularly lacking in merit or logic that they were deemed to have been advanced in “reckless disregard” of the truth, and hence in violation of the False Claims Act.

The contractor’s claim also included an expense table seeking payment for equipment previously purchased as well as equipment not yet purchased and no longer needed because the call had been terminated. Several years after litigation had commenced, the contractor submitted a revised expense report excluding the not yet purchased equipment, which the court deemed too late in the day to avoid liability.

In its defense, the contractor, a foreign company, argued at trial that it did not know how to compile and submit a government claim. The court, in concluding liability, rejected this argument as well as the argument that the contractor had relied on its attorney’s advice and work in submitting the claim.

For contractors and their attorneys, there are several lessons. First, seeking to establish a wholly unsubstantiated monetary amount as a starting point for settlement negotiations is impermissible. In any context, it is bad form. There may be more leeway for this negotiating tactic in a commercial setting. In the government contract world, absent clear factual evidence and a solid legal argument that a specific amount of money is, in fact, owed, contractors should never claim money from the government.

Second, company leadership should ensure that there has been a careful and competent review before allowing any claims to be certified. While False Claims Act liability will not ensue for honest mistakes or innocent math errors, contractors that ignore obvious or glaring errors in their claims, whether they be legal or factual, may well face liability under the reckless disregard standard.

Finally, company leaders should supervise and critically evaluate the work of their attorneys in preparing any claims. This case demonstrates that when a principal fails to adequately supervise the attorney and the result is an erroneous or conflicting claim, the consequence to the contractor can be considerably more than a denial.

However, contractors should not live in unnecessary fear of making a mistake when preparing a claim. Most are fairly straightforward, and a little diligence on the part of a contractor should prevent significant errors. 

That said, the process is not without its pitfalls, and contractors should be aware that it is not only those who set out to defraud the government who fall into False Claims Act snares.

Richard L. Moorhouse is a shareholder and Ryan C. Bradel is an associate in Greenberg Traurig LLP’s government contracts practice group. The views expressed are solely theirs.

Topics: Business Trends, Doing Business with the Government, Defense Contracting, Defense Contracting