In a groundbreaking decision announced last week, a federal court in Virginia held that the minimum statutory civil FCA penalties were unconstitutionally excessive in light of the facts before it, and refused to impose any penalties. This case is the first in which a federal court has determined that it does not have the authority to fashion an alternative penalty under the FCA where the statutory penalty is grossly disproportionate to the government’s loss or defendant’s gain arising from fraudulent conduct. Judge Anthony Trenga’s decision in U.S. ex rel. Bunk v. Birkard Globistics GMBH (E.D. Va. Feb. 14, 2012) should give pause to those pursuing claims under the FCA when they allege the number of “false claims.”
A jury this past summer found the Bunk defendants liable under the FCA for conspiring with subcontractors to fix prices in advance of a bid for a government contract and submitting a false Certificate of Independent Pricing. The Relator did not seek damages, apparently unable to obtain the necessary evidence from the government, but only penalties under the FCA based on the parties’ stipulation that the defendant had filed 9,136 invoices under the fraudulently obtained contract. While Relator proposed a $24 million civil penalty, under the FCA’s mandatory penalty provisions the court calculated the required penalty as no less than $50,248,000 ($5,500 x 9,136).
To determine whether the mandatory minimum penalty violated the Excessive Fines Clause of the Eighth Amendment, the court considered the harm – economic and non-economic – to the government. Based in part on evidence that the defendant’s charges to the government under the fraudulently obtained contract were substantially the same as charges under other contracts as to which there had been no fraud established, and not higher than what the government had paid other contractors in prior years, the court concluded that the Relator failed to establish that the defendant’s fraud caused any economic harm to the government. Significantly with respect to the lack of evidence of non-economic harm, the court relied on evidence that the government twice renewed the defendant’s contract, even after it had received the Relator’s allegations of fraud. Noting that this evidence “does not constitute ‘government knowledge’ sufficient to preclude or estop the government from pursuing claims against the Defendants,” the court did find it probative of the value received by the government. Thus, in light of the lack of evidence of harm to the government, the court deemed the mandatory minimum penalties in excess of $50 million unconstitutionally excessive.
While other courts have concluded that FCA penalties are constitutionally excessive in certain circumstances, what sets Judge Trenga’s decision in Bunk apart is his conclusion “that [the court] must simply refuse to enforce the mandated penalty . . . and not substitute its own fashioned penalty.” The government, with Relator having elected not to seek damages, is thus left with nothing on the claim at issue.
Interestingly, Judge Trenga went on to discuss potential alternative penalties in the event that the Fourth Circuit determines the lower courts do have discretion to fashion alternative penalties under the FCA. He first considered imposing only one penalty for the submission of the false certification. Second, he considered a penalty equal to treble the amount of defendant’s financial gain, totaling approximately $1.5 million. Finally, he considered an alternative amount sufficient to sanction defendant and deter future wrongdoing, and concluded $500,000 would be an alternative penalty. Judge Trenga’s opinion suggests that if ordered to select an alternative penalty, he would impose one $11,000 penalty under the first alternative methodology.
This opinion should be a strong warning to the government and relators’ counsel carefully to consider the calculation of claims and avoid seeking the imposition of penalties that significantly exceed any measure of harm to the government.
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.
“When you strike at a King, you must kill him.”
— Ralph Waldo Emerson
FCA cases are not limited to qui tam actions and federal district courts. Some of the leading procurement fraud jurisprudence arises from cases decided by the United States Court of Federal Claims (COFC) and its appellate court, the Court of Appeals for the Federal Circuit. See, e.g., Daewoo Eng’g & Constr. Co. v. United States, 557 F.3d 1332 (Fed. Cir. 2009); Commercial Contractors, Inc. v. United States, 154 F.3d 1357 (Fed. Cir. 1998). The COFC possesses exclusive jurisdiction over claims in excess of $10,000 “founded . . . upon any express or implied contract with the United States.” 28 U.S.C. §§ 1346, 1491(a)(1). In such a case, however, the government may pursue monetary counterclaims against a plaintiff contractor based upon just about any cause of action, including fraud-related claims, such as the FCA, the Forfeiture of Fraudulent Claims Act (also known as the special plea in fraud), 28 U.S.C. § 2514, and the fraud provision of the Contract Dispute Act (CDA), 41 U.S.C. § 7103(c)(2). The COFC has jurisdiction over CDA cases pursuant to 28 U.S.C. § 1491(a)(2).
Together, the aforementioned fraud remedies are a powerful weapon in the arsenal of the Department of Justice in defending against contractor claims. In that regard – and consistent with Emerson’s aphorism and the old proverb that when dancing with a bear, you don’t decide when to stop – the government’s assertion of fraud counterclaims may radically alter the settlement position of both parties, if not entirely eliminate any motivation on the part of the government to settle a case. For that reason, contractors and their counsel seeking to sue the government in the COFC must be aware not only of the most salient substantive and procedural issues surrounding fraud counterclaims, but also of the government’s settlement calculus, generally, and in counterclaim cases.
A recently published Briefing Paper authored by Sidley Austin attorney Matthew Solomson – entitled When the Government’s Best Defense is A Good Offense: Litigating Fraud And Other Counterclaim Cases Before the U.S. Court of Federal Claims – addresses basic counterclaim issues with which plaintiffs in the COFC need to be familiar, including, but not limited to: counterclaim initiation and pleading requirements; discovery issues; significant substantive legal issues involving the FCA, the CDA’s fraud provision, and the special plea in fraud; scienter issues; parallel proceeding considerations; and settlement negotiations. The Briefing Paper may be accessed here.
The Department of Defense (DoD) recently issued a final regulation, requiring prospective government contractors to represent, as part of their offers, that certain former DOD officials employed by the offeror are in compliance with the post-employment restrictions contained in 18 § U.S.C. 207, 41 U.S.C. §§ 2101–07, 5 CFR parts 2637 and 2641, as well as FAR § 3.104–2. See Defense Federal Acquisition Regulation Supplement: Representation Relating to Compensation of Former DoD Officials (DFARS Case 2010–D020), Final Rule, 76 Fed. Reg. 71,826 (Nov. 18, 2011). Those statutes and regulations are designed to combat the so-called “revolving door” problem of contractors hiring former government employees in order to do business with their former agencies.
Although the new requirement does not change the underlying post-employment restrictions, the new required “representation” opens contractors to greater penalties should they fail to comply. Of course, the point is that should a contractor’s representation prove to be false, the contractor is looking at a possible False Claims Act violation, assuming the requisite scienter is also present. U.S. ex rel. Wilson v. Kellogg Brown & Root, Inc., 525 F.3d 370, 376 (4th Cir. 2008) (quoting Harrison v. Westinghouse Savannah River Co., 176 F.3d 776, 788 (4th Cir. 1999), for the proposition that “the term ‘false or fraudulent claim’ includes those instances ‘when the contract or extension of government benefit was obtained originally through false statements or fraudulent conduct'”); United States ex rel. Willard v. Humana Health Plan of Texas, Inc., 336 F.3d 375, 384 (5th Cir. 2003) (explaining that FCA liability may be imposed “when the contract under which payment is made was procured by fraud”).
DOD, on the other hand, specifically indicated that it “elected to employ a representation rather than a certification.” 76 Fed. Reg. 71826. In that regard, one comment that DOD received argued that the Clinger-Cohen Act prohibits the creation of contractor certifications that are not required by law. In response, DOD acknowledged that “[t]he Clinger/Cohen Act prohibited the creation of contractor certifications that are not required by law,” but asserted that “[t]he FAR and DFARS regularly employ the distinction between a representation and a certification, and representations have regularly been deemed not subject to the Clinger/Cohen Act ban.” Id. at 71828. Indeed, DOD went so far as to say that the new rule does not require the creation of new compliance systems and additional costs should not be incurred.
There are a number of problems with DOD’s explanations.
First, section 4301(b)(1) of the Clinger-Cohen Act of 1996, P.L. 104-106, amended 41 USC § 425 to restrict the inclusion of nonstatutory certification requirements in the FAR. Federal Acquisition Circular 97-11 explained that this statutory provision “apparently” responded to an industry perception that a “certification” requires a high level of attention within the company, may entail personal accountability of the signing official, and is more likely to be subject to criminal prosecution. 64 Fed. Reg. 10530, 10531 (Mar. 4, 1999). Indeed, prior to the enactment of Public Law 104-106, there were over 100 certifications required by law. See 40 No. 14 Gov’t Contractor ¶ 172. Some of the certifications that were specifically eliminated by the Act include the certification of procurement integrity (§ 4304) and the certification regarding a drug-free workplace (§ 4301(a)). Id.
Contractors, however, may well argue that the representation is, in effect, an invalid certification. There do not appear to be any cases addressing when a representation is really nothing more than a prohibited certification, although the GAO has held, in a bid protest decision, that “[a] certification is ‘the formal assertion in writing of some fact.'” Sea-Land Service, Inc., B- 278404 (February 09, 1998). In that regard, the new representation is made pursuant “to the best of its [i.e., the contractor’s] knowledge or belief.” 76 Fed. Feg. 71827. One comment complained about the vagueness of that phrase. In response, DOD asserted that the meaning of the phrase “is a recognized legal term of art,” but the example DOD cited for that assertion is, ironically, the certification required by the Truth in Negotiations Act. 10 U.S.C. § 2306a(a)(2). And, similar language is found in the Contract Disputes Act’s certification requirement. 41 U.S.C. § 7103(b).
Second, DOD does not even attempt to explain what the practical distinction is between a representation and a certification, which is particularly troubling given DOD’s assertion that “[b]y the terms of the representation, an offeror is prohibited from submitting an offer if it cannot make the representation.” 76 Fed. Feg. 71829 (emphasis added). That statement, of course, is an attempt to use the representation as a hook for False Claim Act liability.
In sum, the entire point of the new regulation is to require offerors to verify their employees’ compliance with existing laws and regulations in order to deter non-compliance. The DOD cannot have it both ways. Either the new the new rule is designed to force contractors to be extra careful regarding how they employ and monitor the employment of former DOD officials, or the rule imposes no particular additional duties or costs – but those possibilities are mutually exclusive.
The bottom line is that a representation employing standard certification language is a distinction without a difference for the purposes of the FCA and, notwithstanding any DOD disclaimers to the contrary, contractors should not be lulled into a false sense of security by the “representation” label.