USDA Withdraws Rule Exposing Contractors to FCA Liability for Failure to Report Violations of Labor Laws

Posted by Jonathan F. Cohn and Brian P. Morrissey

Earlier this month, the U.S. Department of Agriculture (USDA) withdrew a proposed rule that would have imposed liability under the False Claims Act on USDA contractors for failure to report violations or alleged violations of federal labor laws. 77 Fed. Reg. 5714 (Feb. 6, 2012); 77 Fed. Reg. 5750 (Feb. 6, 2012). It appears that the rule, if adopted, would have been the first federal regulation to assert FCA liability on this ground. The USDA withdrew the Rule in response to criticism from industry groups, although it remains uncertain whether the agency will reissue the same or a similar rule in the future.

The rule, issued in December 2011, would have required USDA contractors to certify that they were “in compliance with all applicable labor laws” and that, to the best of their knowledge, “all of [their] subcontractors of any tier, and suppliers” were similarly in compliance. See 76 Fed. Reg. 74722 (Dec. 5, 2011); 76 Fed. Reg. 74755. Separately, the Rule would have required contractors to report violations or alleged violations of labor laws to their contracting officer. (The text of the Rule was ambiguous on the question whether this reporting obligation pertained only to violations by contractors themselves, or whether it required contractors to report conduct by their subcontractors and suppliers.) The Rule further stated that contractors’ certifications, if false, could be penalized under the FCA. 76 Fed. Reg. 74722; 76 Fed. Reg. 74755. The Rule was ground-breaking in this respect—it appears to be the first federal regulation that would have called for FCA liability for federal contractors who fail to report violations or alleged violations of labor laws.

This novel application of the FCA underscores the broad reach of the Act, and highlights yet another sector of the economy that could face increased exposure to FCA suits in the future. Most federal courts agree that a claim for payment is cognizable under the Act if it falsely certifies the submitter’s compliance with a condition of Government payment imposed by statute, regulation, or contract provision. See, e.g., United States ex rel. Conner v. Salina Reg’l Health Ctr., Inc., 543 F.3d 1211, 1217 (10th Cir. 2008). In applying this standard, courts have wrestled with the question whether, and to what extent, a claim submitted by a contractor should be interpreted to certify that other parties in the supply chain have also complied with applicable federal rules. The question typically arises in pharmaceutical cases, where a healthcare provider submits a claim based on the use of a product manufactured and supplied by other entities, all of whom might have violated a federal law—such as the Food, Drug, and Cosmetics Act (“FDCA”), 21 U.S.C. § 301, et seq., and the Federal Anti-Kickback Statute (“AKS”), 42 U.S.C. § 1320a-7b(b)(2)—at some point in the course of producing or marketing the drug for which the provider seeks reimbursement. The answer typically depends on the facts—e.g., the precise certification language on the contractor’s claim form and/or the nature of the law that was violated—and has engendered a great deal of litigation. Expanding this theory of liability to violations of labor laws and to contractors in the agricultural industry could represent a new frontier in FCA exposure.

Multiple industry groups objected to the USDA’s rule, including the National Chicken Counsel, the National Turkey Federation, and the U.S. Poultry and Egg Association. See here.  Their objections were numerous, but high on the list was their concern that the Rule would expose contractors to FCA liability for failing to report labor law violations already known to relevant federal law enforcement agencies, and for failing to report any allegation of labor law violations, even a patently frivolous one. The industry groups also expressed concern that the costs of their compliance with this Rule could materially increase the costs of poultry and other agricultural products provided to schools, hospitals, and the military through federal procurement programs.

The USDA withdrew the rule in response to these concerns, but this action may not end the debate. The USDA issued this proposed rule on December 1, 2011 through a Direct Final Rule, 76 Fed. Reg. 74722, and a substantively identical Proposed Rule, 76 Fed. Reg. 74755. The agency stated that the Direct Final Rule would bypass standard notice-and-comment procedures and take immediate effect on February 29, 2012 if no adverse comments were received. If adverse comments were received, however, the agency would withdraw the Direct Final Rule and proceed with standard notice-and-comment procedures on the Proposed Rule.

The USDA withdrew the Direct Final Rule on February 6, 2012 in response to the adverse comments noted above. It also withdrew the Proposed Rule, without explanation. It thus remains uncertain whether USDA plans to re-issue the same or a similar rule at a later time. But the possibility that the agency may do so warrants continued monitoring, especially for those interested in this potential expansion of the FCA.