Source: http://www.law.cornell.edu/supct/cert/07-214
Timestamp: 2014-07-31 17:56:46
Document Index: 528986564

Matched Legal Cases: ['§ 3730', '§ 3730', '§ 3729', '§ 3729', '§ 3729', '§ 3729', '§ 3729']

Allison Engine Co. v. United States (07-214) | LII Supreme Court Bulletin | LII / Legal Information Institute
Allison Engine Co. v. United States (07-214)
False Claims Actdefense contractorsWhistleblowersFederal Fundsfraud
February 26, 2008 Appealed from:
United States Court of Appeals, 6th Circuit (December 19, 2006) FALSE CLAIMS ACT,
DEFENSE CONTRACTORS, WHISTLEBLOWERS, FEDERAL FUNDS, FRAUD
In 1985, the U.S.
Navy contracted with two shipyards for the production of a new fleet of
destroyers. Each destroyer required an electrical generator set to provide
electricity. Several companies became involved in the project to build the
generator sets. None of these companies billed the federal government, but
rather billed the company directly above them in the chain of production. The company directly above them did not include these bills when submitting for payment from the government. This
case began when two whistleblowers sued their former employer and other
government subcontractors under the False Claims Act. The U.S.
District Court for the Southern District of Ohio dismissed their claim after holding that
no FCA violation could occur without evidence that the federal government actually relied on a fraudulent bill. On appeal, the U.S. Court of Appeals for the Sixth Circuit held that the case should continue
because the False Claims Act does not categorically require proof that the fraudulent bill was actually presented to the federal government. The ultimate decision
by the Supreme Court could have important economic consequences for taxpayers, government
contractors, and any party who seeks to file suit under the False Claims Act.
[Question(s) presented] [Issue(s)] [Facts] [Discussion] [Analysis] Question presented
Whether a plaintiff asserting a cause of action under Section
3729(a)(2) or Section 3729(a)(3) of the False Claims Act is required to prove
that a false claim was submitted to the federal government, or whether it is
sufficient to establish that the claim was paid using federal funds. top
False Claims Act has a number of subsections under which contractors may be
found liable for defrauding the federal government. Contractors may be found
liable under subsection (a)(1) only if someone presented a fraudulent bill
to the federal government. Subsections (a)(2) and (a)(3) do not spell
out the same "presentment" requirement in explicit terms. Do these
subsections still include a "presentment" requirement that there be proof that
a false bill was sent to the government, or is it enough to show that the
fraudulent bill was paid with federal funds? top
1863, Congress passed the False Claims Act ("FCA") to address problems associated
with private contractors who had cheated the federal government throughout the
Civil War. United
States v. Allison Engine Co., 471 F.3d 610, 614 (6th Cir. 2006). Some
contractors, for example, charged the Army for supplies in good condition but
delivered spoiled food, defective rifles, and tired mules. Larry D.
Lahman, Bad
Mules: A Primer on the Federal False Claims Act, 76 Okla. B. J. 901, 901 (2005). President
Lincoln hoped that the FCA would provide an effective remedy to curb such
practices. See id. Under
the FCA's qui tam provision, a private citizen can sue a contractor even if government attorneys
decline to help. 31
U.S.C. § 3730(b). The private citizen thus becomes a "relator" suing the contractor for damages on behalf of the United States. 31
U.S.C. § 3730(d). Successful relators give most of the money damages to
the government but are able to keep some as a reward. Id. In 1985, the U.S. Navy contracted with two shipyards
to build new destroyers for its fleet. Brief
for Respondents at 3. Both shipyards subcontracted with other companies
to acquire necessary parts. Id. Among the necessary parts were generators to supply electricity
("Gen-Sets"). Id. The shipyards ordered Gen-Sets from the Allison
Engine Company ("Allison"), which was then a division of General Motors ("GM"). Brief
for Petitioners at 5. Allison then outsourced some of the work to the General Tool Company ("GTC"), which further
subcontracted with Southern
Ohio Fabricators ("SOFCO"). Id. As former employees of GTC, Roger Sanders and Roger Thacker worked on
the Gen-Set assembly teams and suspected the Gen-Sets to be defective. Allison Engine
Co., 471 F.3d at 612. They filed two FCA actions against Allison,
GM, GTC, and SOFCO in 1995. Id. at 610; Brief
for Respondents at 9. The U.S.
District Court for the Southern District of Ohio consolidated the FCA actions into one
case. Allison
Engine Co., 471 F.3d at 612. One action accused the subcontractors
of hiding unfavorable data during price negotiations. Id. at
613. The court, however, held that the subcontractors had no duty to
disclose a mere possibility that their costs might decrease. Id. The
other action accused the subcontractors of knowingly sending bills for
defective Gen-Sets. Id. The
court again ruled for the subcontractors, explaining that Sanders and Thacker
failed to show any false claim actually presented to the U.S. government. Id. The
court reasoned that to prove an FCA violation, one must establish a causal link from the allegedly false claims to the disbursement of government funds. See id. It was not enough, in other words, that each subcontractor got paid with government funds; the court also wanted proof that at least one invoice sent to the government included the allegedly fraudulent amounts charged for the Gen-Sets. See id.
The U.S. Court of Appeals for the Sixth
Circuit upheld the
district court's first judgment but reversed the second. Allison Engine
Co., 471 F.3d at 613. A split three-judge panel held that the FCA
does not always require evidence of false claims actually presented to the
government. Id. at
612, 613. The court found that under two sections of the FCA,
Sanders and Thacker could maintain their claim without actually linking the disbursement of government funds to the allegedly fraudulent bills. Id. at
614-15. The court concluded that so long as the money came from government funds,
simply charging another subcontractor for defective parts could violate the FCA. Id. at
615. Arguing against this conclusion, the subcontractors appealed to the U.S.
Supreme Court, which
granted certiorari on October 29, 2007. Supreme Court Order List: 552 U.S. (Oct.
29, 2007). top
The outcome of this case will determine
whether a party can violate the False Claims Act only if the federal government disburses money in response to a fraudulent bill, or whether it is enough if a third party pays the fraudulent bill with previously disbursed government funds. According to Sanders and Thacker, the two whistleblowers who
started this case, the FCA should apply to anyone who sends a fraudulent bill
for an excessive amount of federal government money. Brief
for Respondents at 32. According to the defendants, the
FCA should apply only to parties whose fraudulent claims influence directly the
disbursement of funds by the federal government. Brief
for Petitioners at 33. A win for Sanders and Thacker would expose to potential FCA
liability many parties that now consider themselves immune from the FCA. Many
companies perform work for the federal government and get paid with federal
funds. Brief
for Amici Curiae Chamber of Commerce, et al. at 3. Yet only some of
these companies bill the federal government directly. Id. The remaining companies simply bill the private parties immediately
above them in the chain of production. See id. In United
States ex rel. Totten v. Bombardier
Corp., Edward Totten alleged that two companies violated the FCA by
overcharging Amtrak for defective railroad cars. 380
F.3d 488, 490 (D.C. Cir. 2004). Amtrak relied on subsidies from the
federal government to fund its business, and Totten reasoned that overcharging
Amtrak was the same as overcharging the federal government. Id. Totten lost, however, when the Court of Appeals for the D.C. Circuit
held that bills could only violate the FCA if actually relied on by the federal government when it disbursed funds. Id. The D.C. Circuit does not have mandatory authority outside its
jurisdictional area, but courts around the country adopted its reasoning and
dismissed many FCA suits. See, e.g., Brief
for Amicus Curiae Marsha Farmer at 1. Unsurprisingly, Sanders and Thacker have the support of
parties that would stand to benefit from a broader interpretation of the FCA.
The U.S. government, for example, receives the bulk of any award obtained in an
FCA action on its behalf. Brief
for Amicus Curiae United States at 2. The U.S. Department of Justice
thus urges that the FCA should be interpreted broadly so that private parties
cannot cheat American taxpayers and escape liability merely because they billed
an intermediate entity that paid with previously disbursed government funds. See id. at 26. A private citizen named Marsha Farmer also supports Sanders and
Thacker because a court recently cited Totten to dismiss an FCA lawsuit
of her own. Brief
for Amicus Curiae Marsha Farmer at 1. Senator Charles Grassley, who in
1986 sponsored amendments to the FCA, supports a broadly construed FCA as well:
"Given the absence of any reference to presentment in the plain language of
[the relevant] provisions . . . it is not surprising that [Sanders and Thacker
should win]." Brief
for Amicus Curiae Senator Charles E. Grassley at 5. Meanwhile, the defendants enjoy the support of
parties that rely on a narrow interpretation of the FCA to save costs. Speaking
on behalf of the business community, the U.S. Chamber of Commerce warns that
a broadly interpreted FCA would force government subcontractors to charge
higher prices to offset the risk of additional lawsuits. Brief
for Amici Curiae Chamber of Commerce, et al. at 15. Even the most
honest government subcontractor would need to buy additional insurance or set
aside extra funds to defend against possible FCA suits. Id. The American Hospital Association (AHA) and American Health Care Association (AHCA) point out that most FCA lawsuits involve accusations of health care
fraud. Id. at 6. The AHA and AHCA claim that the vast majority of these accusations
prove baseless once they reach trial. Id. To keep health care costs down, the AHA and AHCA argue that providers who
never bill the federal government should never have to face the threat of a
lawsuit under the FCA. See id. The Washington Legal Foundation (WLF)
elaborates on this point through the logic of no-harm, no-foul: "there must be
a causal link between the fraud . . . and the Federal Government's decision to
pay the claim." Brief
for Amicus Curiae Washington Legal Foundation at 16. According to the WLF, it makes no sense to label something a fraud on the federal government
without proof that the federal government paid more money because of the fraud. Id.; see also Brief
for Amici Curiae Continental Common, et al. at 2. Interestingly, both sides in the debate claim to represent
the public interest because they offer different views about the true victims
of fraud by government subcontractors. For supporters of a narrowly interpreted
FCA, fraudulent billing by subcontractors injures only the contractor that
actually distributes government funds. Brief
for Amici Curiae Chamber of Commerce, et al. at 18. They argue that
when the government disburses a fixed amount of money for a project, a
fraudulent bill between subcontractors causes no harm to the taxpayers. Id. at 11. Any fraud between government contractors will thus "come out
of the prime contractor's pocket . . . ." Id. Taxpayers Against Fraud ("TAF"),
responds that taxpayers should not have to depend on private contractors to
expose wasteful spending of taxpayer money. See Brief
for Amicus Curiae Taxpayers Against Fraud at 23. In a specialized
market with few competitors, fraudulent billing may be so common
that the prime contractor just takes inflated prices into account when
negotiating a contract with the government. See id. at 26. Thus, an original disbursement of government funds may already be
inflated to reflect fraud. See id. The way to combat such fraud, concludes TAF, is to allow anyone to
sue under the FCA as long as they can expose a fraudulent claim for taxpayer
3729(a)(2) Question The
False Claims Act ("FCA"), 31 U.S.C. § 3729(a)(2) imposes liability upon anyone who
"knowingly makes, uses, or causes to be made or used, a false record or
statement to get a false or fraudulent claim paid or approved by the [federal]
government." Similarly, 31 U.S.C. § 3729(a)(1) holds liable anyone who "knowingly
presents, or causes to presented" such a claim "to an officer or employee or the
United States Government." In United
States ex rel. Totten v. Bombardier Corp., the D.C. Circuit examined
whether submission of a false claim to Amtrak which Amtrak paid with federal
funds violated the False Claims Act. In concluding that it did not, the D.C.
Circuit held that subsection (a)(2) contained a presentment requirement,
meaning that a violation of (a)(2) only occurs after submission of a fraudulent
claim to the government itself, rather than to a middleman organization. 380
F.3d 488 (D.C. Cir. 2004), cert denied 544 U.S. 1032 (2005). The court
supported its decision by pointing to (a)(2)'s language "paid or approved by
the government." This language, the court concluded, reinforced the distinction
between the government and government contractors. See 380 F.3d 488. Allison
Engine Co. ("Allison") similarly points to the plain language of (a)(2), emphasizing that the statute
says "paid or approved by the government" rather than "paid with government
funds or approved by a recipient of government funds." See Brief
for Petitioners at 13. The
U.S. Supreme Court had previously distinguished between the government and
private organizations receiving government money, such as government
contractors, in Tanner v. U.S. 483 U.S. 107 (1987). In Tanner,
the Court held that a conspiracy to swindle a private company which received
federal funds was not a conspiracy against the United States. See id. However, Tanner was decided under 18 U.S.C. 371 rather than under the False Claims Act. See id.
and Thacker argue that applying Tanner to the FCA is improper because Tanner analyzed a different statute. See Brief
for Respondents at 18-19. They emphasize that each statute has
different goals, and cite to United States v. Neifert-White Co., 390 U.S. 228 (1968), in which
the Court said that the FCA is meant "to reach all types of fraud, without
qualification, that might result in financial loss to the Government." See Brief
for Respondents at 1. To
further support this broad interpretation of the FCA, Sanders and Thacker point
to 31 U.S.C. § 3729(c), which defines "claim" for purposes of
the FCA. See Brief
for Respondents at 22. Under subsection (c), a claim includes requests
for money submitted to a third party if the U.S. Government reimburses the third
party for any of the money requested. 31
U.S.C. § 3729(c). Based on this definition, Sanders and Thacker state
that liability under (a)(2) for having a false claim paid or approved by the
government includes more than liability for fraudulently seeking government
money through an invoice sent to the government. Rather, it means that the persons must seek
government money in general. See Brief
for Respondents at 29. Otherwise, they claim, the definition of "claim"
in subsection (c) would be meaningless. See id. at 27. They compare their interpretation to a student whose expenses are
paid by his parents. The student's parents do not send money directly to his
creditors, but rather are the ultimate source of the money used to pay the
expenses. See id. at 25. Allison argues that such an interpretation substitutes "paid
or approved by the government" with "paid or approved by anyone receiving
federal financial assistance." See Brief
for Petitioners at 22-23. Instead, Allison proposes that subsection (c)
imposes liability upon persons submitting a claim to a third party if they
afterwards submit the claim to the government. See id. at 24. Sanders
and Thacker point to the plain language of (a)(2), which contains no express
presentment requirement. They claim that a presentment requirement would add an
extra element of liability to prove beyond what the plain language requires. See Brief
for Petitioners at 26. In Totten, the D.C. Circuit further supported its
distinction between the government and government contractors by reasoning that
subsections (a)(1) and (a)(2) used to be part of the same subsection, and since
(a)(1) explicitly has a presentment requirement, subsection (a)(2) must as
well. See 380
F.3d at 499-500. Allison builds upon the D.C. Circuit's argument by
stating that (a)(1) and (a)(2) serve complementary functions. See Brief
for Petitioners at 19-20. If (a)(2) does not also contain a presentment
requirement, plaintiffs would be able to avoid (a)(1)'s presentment requirement
by suing under (a)(2), according to Allison. See id. at 19. Plaintiffs could do so by asserting that the false claim under
(a)(1) was a "false record or statement" for purposes of (a)(2). See id. Allison claims that this would render (a)(1) useless, and notes the Supreme
Court has repeatedly cautioned against interpreting one section of a statute in
a way that would nullify another. See id. at 20. Sanders and Thacker counter on the grounds that Allison's
interpretation renders (a)(2) meaningless. See Brief
for Respondents at 28. They state that presentment of a "false record
or statement" under (a)(2) would be just a type of (a)(1)'s presentment of a
false claim. See id. Instead, according to Sanders and Thacker, (a)(1) and (a)(2) include two
distinct types of prohibited conduct: presentment of a false claim and making
or using a false record. See id. at 37.
The 3729(a)(3) Question The
False Claims Act ("FCA"), 31 U.S.C. § 3729(a)(3) imposes liability upon persons
conspiring to defraud the federal government "by getting a false or fraudulent
claim allowed or paid." Allison insists that subsection (a)(3) only applies to
conspiracies to submit a false claim to the government rather than conspiracies
to submit a false claim to a third party ultimately reimbursed by the government.
It supports this position by saying the language reads "conspiring to defraud
the federal government" rather than "conspiring to defraud recipients of
federal funding." Furthermore, it claims that liability under (a)(3) is
limited by the scope of liability in subsections (a)(1) and (a)(2), where (it argues)
there is a presentment requirement. See Brief
for Petitioners at 29-32. The Sixth Circuit held, and Sanders and
Thacker argue, that subsection (a)(3) is distinct from subsections (a)(1) and
(a)(2). Sanders and Thacker emphasize that it imposes liability on different
conduct-conspiracy, and therefore liability under (a)(3) cannot be derivative
of liability under the previous subsections. If (a)(3) had a presentment
requirement, they insist, conspiracy liability under (a)(3) would just be a
type of conduct which violates (a)(1) rather than its own separate provision. See Brief
for Respondents at 49-52.
Allison argues
that the Sixth Circuit's holding that there is no presentment requirement in
subsections (a)(2) and (a)(3) applies the FCA to conduct which Congress never
intended for it to cover. See Brief
for Petitioners at 32. Rather than cover false claims for government
money, the FCA would apply to all false claims submitted to any recipient of
federal money, including local schools and universities. See id. at 33. This, they argue, would mean that any false claim submitted to a
government contractor would fall under the FCA, regardless of whether the claim
was for work benefiting the government. See id. at 34. Such claims, Allison states, are properly dealt with by state rather
than federal law. See id. at 33. Sanders and Thacker counter that a presentment requirement would
restrict the FCA beyond what Congress intended. See Brief
for Respondents at 19. Congress intended, they state, for false claims
submitted to Medicare and Medicaid to be actionable under the FCA. See id. However, such claims are not submitted to the government and thus, they
claim, would be wrongfully precluded under Allison's interpretation. See id.
In Allison Engine Co. v. U.S., the Supreme Court will clarify who may be
held liable under the federal False Claims Act. If the Court decides for
Sanders and Thacker, a party who submits a false claim to a federal government
contractor may be held liable even if the false claim is never submitted to the government. If
the Court instead finds for Allison and its co-defendants, a party engaged in fraudulent acts may not
be held liable under the False Claims Act unless the federal government receives the false claim.
Regardless of how the Court decides, this case will affect how fraud in federal
government contracts is responded to and will also impact the U.S. treasury and
taxpayers. Authors
Condon and Michael
Litvin Edited
Birnbaum Additional Sources
Cases involving the False Claim Act
U.S. Department of Justice Overview of
Government Intervention in Qui Tam Suits
Library of Congress Guide to Federal Government
Tam Online Network top