THE FALSE CLAIM ACT
A Tangled Web You Don’t Want To Get Caught In
The Federal False Claim Act has been around for awhile; since the Civil War in fact. Its purpose then, and its purpose now, is to be a significant disincentive to contractors that are thinking about bilking the government out of money. California has its own version of the FCA and much of what is included in the CFCA is similar to, although not entirely the same as, the Federal FCA. In fact California looks to the Federal courts for guidance when applying the CFCA and so what is good for the Federal goose is often good for the California gander.
The CFCA like its Federal counterpart is intended to dissuade contractors from turning in bills that are either exaggerated amounts or are simply fabrications. It does this by imposing some fairly stiff penalties if a violation is proved. The government can recover three times the claim amount as damages, plus costs and a penalty of $ 10,000 for each false claim. A violation can also result in debarment and that can have a very long term effect.
A false claim under either the Federal or California statutes includes the same elements to establish the cause of action. There has to be a false or fraudulent claim, that was material to the decision making process of the governing agency, that the defendant contractor presented or caused to be presented to the government for payment, and with knowledge that the claim was false or fraudulent.
There are a number of ways that the False Claim Act has been applied over the years, typically when the contractor exaggerates its costs and the government calls them on it. Without the necessary supporting documentation, the contractor may find themselves not only without payment, but with a substantial fine to boot. There are other ways that the FCA comes into play and sometimes these are not what you might expect.
In a recent Federal case, Hooper v Lockheed Martin Corp (2012), the FCA was expanded. There the court ruled that estimates can give rise to liability under the FCA. If the contractor knows that the bid that is submitted is not sufficient to cover the costs of the project, but the contractor submits it anyway so that it can get the job and then (presumably) take advantage of change orders to fill in the missing funding, this can give rise to a false claim.
The Federal Courts have also held that collusion between contractors before a bid is submitted can also constitute a False Claim. In one case a group of electrical contractors got together and conspired to rig bids that were submitted on public works projects. The contractors would first average their bids then agree amongst themselves who would submit the “average” bid and all of the others would submit higher bids. The court ruled that the billings that followed from this fraudulent activity were false claims because they derived from the fraudulent activity of the bid rigging. The court analogized it to fraud in the inducement.
So why would a public agency take such a low bid in the first place? The short answer is they might have to. Under the California Public Contract Code, the lowest responsible bidder is awarded the contract. If the bidder is deemed responsible (has all of the necessary qualifications and experience) and the bid is responsive (has all the necessary elements) then the public owner has no alternative but to accept the bid. The public agency is protected from the default of the contractor in the event the low bid proves to be too low by the bid bond that must be posted, but it is not protected from the contractor’s efforts to manipulate the project billing after the project is awarded. That’s where the False Claim Act can now come into play.
There are other ways the CFCA can be triggered. California courts have determined that change order proposals are not false claims because they are not intended to induce any payment from the public agency. The proposal is the contractual requirement that precedes the owner’s approval of the change order. However, once that change order proposal is approved and is billed to the owner, then it can become a false claim if the amount billed is excessive or fraudulent.
Representations in catalogues or other sales materials that are not true can also lead to False Claim liability. For example, a manufacturer of pipe represented in its sales materials that the pipe it sold had certain percentages of various metals when in fact the pipe did not meet those specifications. The City of Pomona had dealt with this particular manufacturer for years under the mistaken belief that the pipe it was buying met the standard that was specified. It didn’t and the court determined this was a viable false claim action.
Bottom line: If you are working in the public arena you need to be aware of the False Claim Act. It is there for a purpose and that purpose is to discourage unscrupulous contractors from overcharging for their work. It is not something to take lightly and it is a nasty piece of business if you get caught up with it. In a word, DON’T!
The CFCA like its Federal counterpart is intended to dissuade contractors from turning in bills that are either exaggerated amounts or are simply fabrications. It does this by imposing some fairly stiff penalties if a violation is proved. The government can recover three times the claim amount as damages, plus costs and a penalty of $ 10,000 for each false claim. A violation can also result in debarment and that can have a very long term effect.
A false claim under either the Federal or California statutes includes the same elements to establish the cause of action. There has to be a false or fraudulent claim, that was material to the decision making process of the governing agency, that the defendant contractor presented or caused to be presented to the government for payment, and with knowledge that the claim was false or fraudulent.
There are a number of ways that the False Claim Act has been applied over the years, typically when the contractor exaggerates its costs and the government calls them on it. Without the necessary supporting documentation, the contractor may find themselves not only without payment, but with a substantial fine to boot. There are other ways that the FCA comes into play and sometimes these are not what you might expect.
In a recent Federal case, Hooper v Lockheed Martin Corp (2012), the FCA was expanded. There the court ruled that estimates can give rise to liability under the FCA. If the contractor knows that the bid that is submitted is not sufficient to cover the costs of the project, but the contractor submits it anyway so that it can get the job and then (presumably) take advantage of change orders to fill in the missing funding, this can give rise to a false claim.
The Federal Courts have also held that collusion between contractors before a bid is submitted can also constitute a False Claim. In one case a group of electrical contractors got together and conspired to rig bids that were submitted on public works projects. The contractors would first average their bids then agree amongst themselves who would submit the “average” bid and all of the others would submit higher bids. The court ruled that the billings that followed from this fraudulent activity were false claims because they derived from the fraudulent activity of the bid rigging. The court analogized it to fraud in the inducement.
So why would a public agency take such a low bid in the first place? The short answer is they might have to. Under the California Public Contract Code, the lowest responsible bidder is awarded the contract. If the bidder is deemed responsible (has all of the necessary qualifications and experience) and the bid is responsive (has all the necessary elements) then the public owner has no alternative but to accept the bid. The public agency is protected from the default of the contractor in the event the low bid proves to be too low by the bid bond that must be posted, but it is not protected from the contractor’s efforts to manipulate the project billing after the project is awarded. That’s where the False Claim Act can now come into play.
There are other ways the CFCA can be triggered. California courts have determined that change order proposals are not false claims because they are not intended to induce any payment from the public agency. The proposal is the contractual requirement that precedes the owner’s approval of the change order. However, once that change order proposal is approved and is billed to the owner, then it can become a false claim if the amount billed is excessive or fraudulent.
Representations in catalogues or other sales materials that are not true can also lead to False Claim liability. For example, a manufacturer of pipe represented in its sales materials that the pipe it sold had certain percentages of various metals when in fact the pipe did not meet those specifications. The City of Pomona had dealt with this particular manufacturer for years under the mistaken belief that the pipe it was buying met the standard that was specified. It didn’t and the court determined this was a viable false claim action.
Bottom line: If you are working in the public arena you need to be aware of the False Claim Act. It is there for a purpose and that purpose is to discourage unscrupulous contractors from overcharging for their work. It is not something to take lightly and it is a nasty piece of business if you get caught up with it. In a word, DON’T!