Contractors Vulnerable to Growing Number of ‘False Claims’ Suits

Under a recent court decision by the Fourth Circuit, a federal government contractor may suddenly find itself facing potentially massive liability based solely on the number of invoices submitted in previous years, even if every one of those invoices was entirely accurate.

If allowed to stand, the Fourth Circuit’s ruling in United States ex rel. Bunk v. Gosselin World Wide Moving, N.V., 741 F.3d 390 (4th Cir. 2013) will make the defense industry more vulnerable to a growing number of suits brought under the False Claims Act.  

Under the so-called “per-invoice rule” adopted in the case, contractors could be subject to millions of dollars in civil penalties under the FCA based solely on how often they happen to invoice the government, even if the government has not suffered any damages.

Because the Fourth Circuit’s jurisdiction spans the Washington, D.C. metro area, where many defense contractors are based, the rule’s impact may be acutely felt in the defense sector.  
Apetition for the Supreme Court to review this case is currently pending and is being watched closely by the industry.

The mechanical per-invoice rule is not only wrong as a matter of law, but it also subjects contractors to legal and monetary risks that are disproportionate to the benefits they gain from participation in federal procurement.  

Defense contractors are well aware of the liability risks posed by the ever-expanding FCA. The pace and scope of the act’s enforcement actions have mushroomed in recent years, driven in part by aggressive theories of liability and by the rise of increasingly sophisticated and opportunistic private qui tam lawsuits. 

Under the FCA, a private citizen may sue an individual or a business that is defrauding the government and recover funds on the government's behalf. This qui tam lawsuit is filed “under seal,” meaning that it is kept secret from everyone but the government to give the Department of Justice time to investigate the allegations and to decide if it wants to join or “intervene” in the lawsuit. Even the person or contractor being accused of fraud is not told about the qui tam case.  

Relators have every incentive to “find” fraud at defense contractors. The relator’s share of an award ranges from 15 to 25 percent — and up to 30 percent if the Justice Department declines to intervene. Of the $4.9 billion in fiscal year 2012 recoveries from all industry sectors, a record $3.3 billion was recovered in qui tam whistleblower suits, while in fiscal year 2013, $2.9 billion of the total $3.8 billion the Justice Department recovered in FCA cases was attributable to qui tam lawsuits.  

The Justice Department has published statistics evidencing a steady rise in the number of qui tam actions brought in the defense sector. Reductions in federal spending and the resulting contractor layoffs already provide fertile ground for qui tam whistleblower lawsuits from disgruntled employees.  The potential for large recoveries makes these suits attractive to potential qui tam plaintiffs.  

The Gosselin case involved a qui tam relator’s allegations that Gosselin, a Belgian shipping company holding a government contract to transport goods to U.S. military personnel in Europe, had illegally conspired to fix shipping rates and had submitted a false certificate of independent price determination with its bid. As a result, the qui tam relator alleged that all of Gosselin’s invoices that were submitted to the government constituted false claims under the FCA.  

At trial, the qui tam relator did not attempt to prove that the government had suffered any damages as a result of the single false certification. Instead, he sought only the statutory civil penalties.

These penalties amount to $5,500 to $11,000 for each false claim invoice submitted to the government. If the 9,136 invoices were multiplied by the minimum $5,500 penalty, the exposure for Gosselin would have exceeded $50 million. The relator in the case, however, proposed to seek $24 million.

The Fourth Circuit ultimately agreed to the $24 million penalty, affirming a mechanistic per-invoice method for calculating statutory penalties in the process. The court found that each invoice was a separate false claim under the FCA even though each individual invoice was truthful on its own. Only the original certificate of independent pricing submitted with the proposal was ultimately determined to be false.

Although the court upheld the penalty, it acknowledged that the number of invoices presented to the government is not a reasonable indicator of the liability that ought to attach to an FCA defendant, and it described its per-invoice rule as a “monster of our own creation.” Nonetheless, the court justified its holding on the generic ground that a $24 million penalty “appropriately reflects the gravity of Gosselin’s offenses and provides the necessary and appropriate deterrent effect going forward.”

Gosselin has filed a petition for review of the Fourth Circuit decision by the Supreme Court. The petition has attracted significant attention in the legal and business world, and both the National Defense Industrial Association and the Pharmaceutical Research and Manufacturers of America recently submitted amicus curiae briefs supporting Gosselin’s request for review.

If allowed to stand, the per-invoice rule imposed by Gosselin could have significant impact on defense contractors.  

First, Gosselin’s per-invoice rule separates the amount of the penalty from the defendant’s actual culpability. For any given contract, the number of invoices can vary depending on factors such as the type of contract, the economics underlying the transaction and the requirements of the particular contracting officer.

As an example, a company might have a Schedule 70 contract with the General Services Administration to sell IT products and services to the federal government. The contractor provides commercial sales information that is used to set the pricing. The company’s automotive division also has a sole-source contract with the U.S. Army to supply spare parts for trucks. The company submitted cost or pricing data to help establish a price and certified that the data were current, accurate and complete.

The GSA schedule and Army spares contracts would potentially generate hundreds or even thousands of invoices over the course of the contract. Simply because a contractor submits more invoices should not expose it to exponentially increased liability absent damages to the government. Thus, a contractor that bills for 10 spare parts on 10 different invoices should not be subject to 10 times the liability of a contractor that bills all of those parts on one invoice.

Second, the per-invoice rule creates a financial incentive for qui tam whistleblowers to bring actions even if they are without any merit. The specter of potentially enormous liability, especially for high-invoicing contractors dedicated to government procurement, ratchets up the pressure to settle FCA actions, even those without merit. The increased likelihood of obtaining a large settlement will only further incentivize additional qui tam lawsuits.  

Finally, the per-invoice rule increases the costs of doing business with the government. Similarly, because the per-invoice rule acts as a disincentive to frequent billing, businesses that are less able to tolerate diminished cash flow may be driven from the public procurement sector.

Susan Cassidy (scassidy@cov.com) is a partner and Mike Wagner an associate at Covington & Burling, in Washington, D.C. The firm drafted the amicus brief that was submitted in support of Gosselin’s petition for writ of certiorari.

Topics: Defense Contracting