Contractor Fraud Against the Federal Government: Selected Federal Civil Remedies
Released: 2014-04-01T00:00:00

Introduction

The federal government relies heavily on contractors to supply it with goods and services. Each year, fraud by these contractors potentially costs the government billions of dollars. Detecting, prosecuting, and deterring contractor fraud poses a challenge to federal agencies, which often possess limited resources. Contractor fraud comes in many forms, including false or fraudulent claims for payment made under a contract or as part of the contract disputes process; false statements; bid rigging; defective pricing; cost mischarging; product substitution; and false certification of small business size or status.

Congressional efforts to deter contractor fraud extend at least as far back as the passage of the False Claims Act (FCA) during the Civil War. Since that time, Congress has enacted several statutes that allow the federal government—and in some instances, private parties—to recover damages, civil penalties, or forfeitures for false or fraudulent claims for payment and other misconduct. Since the passage of the FCA, Members of Congress, courts, and others have continued to debate the proper scope of liability under these civil fraud statutes.

Recoveries of large damage awards and penalties by the government or private parties under these statutes have brought new attention to this debate. For example, in FY2013, the Department of Justice (DOJ) recovered about $3.8 billion in settlements and judgments under the FCA, which represents the federal government's primary civil fraud remedy. Of this amount, recoveries from procurement fraud cases accounted for a record $890 million. The government has also recovered large civil penalties and forfeitures from contractors who submit fraudulent claims for payment as part of the contract disputes process, including in a recent case in which the Federal Circuit affirmed the Court of Federal Claims' (COFC's) assessment of a $50.6 million civil penalty against a contractor under the Contract Disputes Act's (CDA's) anti-fraud provision and rendered judgment of forfeiture of a $13.3 million contractor claim under the Forfeiture of Fraudulent Claims Act (FFCA). Some federal statutory civil fraud remedies may be cumulative, raising the possibility that the government could potentially recover significant sums, particularly if it suffers damages.

In addition to the significant damage awards that plaintiffs may recover under some of these statutes, courts may find a contractor civilly liable under these laws for conduct that may not amount to fraud under traditional common law definitions. Although many provisions in federal civil fraud statutes require the existence of a "claim" for payment from the government, the statutes may impose civil penalties and forfeitures even when the government has not relied on, or suffered damages from, the claim. Moreover, recent statutory and judicial developments under the FCA have reduced the level of "knowledge" that a defendant must possess in order to be liable and extended the scope of the act to cover a wider range of conduct than the common law typically encompasses.

Congress has an interest in the scope of federal civil fraud remedy statutes. In order to be effective, these statutes must be broad enough to punish and deter fraud that often evades detection, wastes taxpayer funds, and negatively impacts government programs. On the other hand, if courts interpret a fraud statute so broadly that it imposes civil liability on contractors for minor regulatory violations or ordinary breaches of contract—possibly resulting in a contractor having insufficient notice as to which actions will result in liability —contractors may decline to compete for government contracts. This could lead to higher prices for the government.

This report provides an overview of federal statutes that provide civil remedies for contractor fraud, as well as issues stemming from judicial interpretation of these statutes. These statutes include the civil FCA, anti-fraud provision of the CDA, FFCA, and the Program Fraud Civil Remedies Act. The report also briefly examines regulatory and judicial developments that have implications for enforcement of the FCA, including the circuit split regarding the calculation of treble damages under the FCA; the Mandatory Disclosure Rule; and the Presumed Loss Rule.

Civil False Claims Act

Congress originally enacted the FCA in 1863 to combat fraud by Civil War defense contractors. Since that time, Congress has occasionally adjusted the scope of the FCA's civil liability provisions in response to judicial developments and shifting perceptions of the prevalence of fraud against the federal government. In its current form, the FCA imposes civil liability on "any person" who engages in at least one of seven forms of misconduct. The FCA authorizes the Attorney General, as well as certain private parties that sue on behalf of the United States under the act's qui tam provisions, to bring a civil action against an alleged violator of the act. Liability under the FCA requires no specific proof of intent to defraud.

Liability under two provisions of the FCA frequently used against contractors requires, among other things, the existence of a "false or fraudulent" claim for payment from the government. Some federal courts have developed theories that expand the definition of a "false or fraudulent" claim. Under the implied false certification and fraud in the inducement theories, claims for payment that are not explicitly false may become false by implication because of a party's actions or omissions prior to contract formation or during contract performance. Some courts have expressed concerns that, under these theories, a defendant could become liable for ordinary breaches of contract or minor regulatory violations. Thus, some courts have limited the use of the theories by strictly enforcing the FCA's mental state requirement; the heightened pleading requirements for fraud allegations under Federal Rule of Civil Procedure 9(b); or some form of materiality requirement.

In addition to discussing the scope of liability under the FCA, this section also examines a circuit split involving the method by which courts calculate treble damages under the act when the contractor has provided at least some value to the government.

Overview

Congress enacted the FCA in 1863 to detect, punish, and deter fraud against the federal government by defense contractors during the Civil War. In its current form, the FCA imposes civil liability on "any person" who engages in at least one of seven forms of misconduct. Parties bringing claims against contractors under the FCA frequently invoke two of the act's provisions. These provisions impose liability for treble damages and a civil penalty on "any person" who "knowingly presents, or causes to be presented, a false or fraudulent claim for payment or approval" or "knowingly makes, uses, or causes to be made or used, a false record or statement material to a false or fraudulent claim." Many federal courts of appeals require parties bringing an FCA cause of action to show that the falsity of the claim or statement is material to the government's (or its intermediary's) decision to pay the claim. The party bringing an FCA cause of action against a contractor must prove its elements, including damages, "by a preponderance of the evidence." Unlike some of the other federal civil fraud remedy statutes discussed in this report, liability under the FCA requires no specific proof of intent to defraud.

The FCA authorizes the Attorney General, as well as certain private parties that sue on behalf of the United States under the act's qui tam provisions (known as "relators"), to bring a civil action against an alleged violator of the act. Generally, the Department of Justice (DOJ) may intervene in a relator's suit within a certain time period after receiving the complaint and other material information. If the DOJ intervenes, then it conducts the action. If the DOJ declines to intervene, the relator may proceed with the action. When the DOJ conducts an action initially brought by a relator, the court may award the relator between 15 to 25 percent of the proceeds of the action or settlement of the claim "depending upon the extent to which the person substantially contributed to the prosecution of the action." If the government declines to intervene, the relator may receive between 25 and 30 percent of the proceeds of the action or settlement.

Recent Amendments

Since enacting the FCA, Congress has periodically amended the act to, among other things, change the extent to which the act exposes contractors and other parties to potential civil liability. For example, in 1943, the Supreme Court expanded the reach of the act's qui tam provisions, holding that a relator's action under the FCA could be based solely on knowledge already possessed by the government and made public in a criminal indictment. Congress reversed this decision by enacting a law that stripped federal courts of jurisdiction over suits brought by relators when the government already had knowledge of the alleged fraud underlying the relator's complaint. In the same law, Congress also limited whistleblower lawsuits by reducing the share of the recovery a relator could obtain in a successful suit.

By contrast, decades later, Congress sought to strengthen the FCA in the wake of evidence of extensive fraud against the federal government by defense contractors and others. In 1986, Congress restored courts' jurisdiction over some qui tam suits based on publicly disclosed information, including suits in which relators were an "original source" of information about the alleged fraud. The amendments also relaxed the knowledge standard for liability, making clear that liability required no specific intent to defraud.

More recently, Congress amended the FCA in response to various judicial developments that some perceived as having weakened the act. In 2009, Congress passed the Fraud Enforcement and Recovery Act (FERA). Among other things, FERA eliminated language suggesting that a false claim must be submitted directly to a federal officer or employee and added a specific materiality element to the act's "false statements" provision. Congress made additional amendments to the FCA in the Patient Protection and Affordable Care Act (PPACA) of 2010 that, among other things, reduced some of the jurisdictional obstacles to qui tam suits.

Implied False Certification Theory

As described above, one element that the United States or a relator must prove in order to establish a defendant's liability for fraudulent misconduct under sections 3792(a)(1)(A)-(B) of the FCA is that the claim is "false or fraudulent." Congress did not define this phrase in the FCA, and thus courts have developed a body of case law interpreting it. One formulation of the judicially created implied false certification theory allows the United States or a relator to establish the falsity of a claim for payment even when the claim is not explicitly false because "the act of submitting a claim for reimbursement [or payment] itself implies compliance with governing federal rules that are a precondition to payment."

However, courts have not adopted this definition uniformly. Thus, for example, some courts do not mandate that compliance with a law or contractual provision be an express precondition of payment, requiring only that it be material to the government's decision to pay the claim. Some courts hold that a violation of a contractual provision may make a claim for payment false under the implied certification theory. In addition, a couple of courts that have recognized the theory have done so in cases in which the claimant has previously expressly certified that it would comply with a law.

Although the government and relators have often used the implied false certification theory in an effort to establish the falsity of claims for payment by contractors, the text of the FCA does not explicitly appear to recognize the theory. Moreover, it does not appear that the Supreme Court has addressed the theory's viability. Nevertheless, federal courts of appeals in the First, Second, Third, Sixth, Ninth, Tenth, Eleventh, and District of Columbia circuits have adopted this theory of falsity in some form. Courts that have adopted the theory have found support for it in the FCA's structure and legislative history, as well as language in Supreme Court opinions about Congress' intent that the FCA encompass a wide range of fraudulent conduct.

Examples

Decisions by federal courts in FCA cases illustrate attempts to use the implied false certification theory in civil lawsuits against contractors. It appears that the earliest use of the term "implied certification" in an FCA decision occurs in the Court of Federal Claims' 1994 opinion in Ab-Tech Construction, Inc. v. United States . In this case, a subcontractor agreed to comply with the eligibility requirements of the Small Business Administration's (SBA's) "8(a) Program" in order to receive a contract from the agency. Federal regulations required Ab-Tech to obtain the SBA's approval prior to entering into "any management agreement, joint venture agreement or other agreement relative to the performance of a section 8(a) subcontract." The court held that by submitting payment vouchers to the government without disclosing that it had entered into a prohibited contractual arrangement with a non-minority owned business, Ab-Tech falsely and by implication certified compliance with the eligibility regulations that were critical to the government's payment decision. This, the court held, resulted in a false claim under the FCA. The court reasoned that these claims were false in part because they "caused the Government to pay out funds in the mistaken belief that it was furthering the aims of the 8(a) program."

Examples of recent implied false certification cases in the procurement context include cases in which parties have alleged that a contractor submitted a claim for payment while failing to comply with contractual provisions (express or implied); laws; or, most commonly, requirements established by law and contract.

Limitations on the Theory

Some courts that recognize the implied false certification theory have limited its reach. For example, several federal courts of appeals require that the defendant's compliance with the law or contractual provision it has allegedly violated be a precondition of payment by the government. Some of these courts have stated that the FCA is not an "enforcement device" for "minor" violations of law or breaches of contract. In addition, at least one commentator has noted that such a requirement makes the contractor aware of which violations of law or contract may result in FCA liability, allowing contractors to focus their resources on monitoring for compliance with these requirements. Other courts that recognize the implied certification theory do not mandate that compliance be an express precondition of payment, requiring only that the law or contractual provision be material to the government's decision to pay the claim. One commentator has criticized this rule as failing to provide contractors with notice of which requirements they must comply with in order to avoid liability.

Courts have also imposed limits on defendants' liability for implied false certifications of compliance—at least with contractual provisions—by reference to the FCA's knowledge (or "scienter") requirement. For example, in the D.C. Circuit, the United States or relators must show that a defendant knows "(1) that it violated a contractual obligation, and (2) that its compliance with that obligation was material to the government's decision to pay." However, when the government pays a claim while possessing knowledge that a contractor has violated a law, regulation, or contractual provision, this may negate the contractor's intent to make a false claim or statement, at least when the government has directed the contractor's participation in, or consented to, the violation. In addition, some courts have found that a contractor may lack the requisite knowledge when it has made a plausible but erroneous interpretation of the contract "absent some specific evidence of knowledge that the claim is false or of intent to deceive," at least when the interpretation is not unreasonable.

Because a cause of action under the FCA alleges fraud, some courts have held that Federal Rule of Civil Procedure 9(b) requires the government or relator to plead the elements of such actions with sufficient particularity in order to avoid having the actions dismissed by a court for failure to state a claim for relief. This requirement is intended to give the defendant fair notice of the fraud it allegedly committed so that the defendant may prepare a response to the claims; narrow the scope of discovery; and protect defendants from harm to their reputations from fraud allegations.

Fraud in the Inducement Theory

In contrast to the implied false certification theory, which holds that a claim for payment under a government contract becomes false because of a contractor's conduct during contract performance, the fraud in the inducement or "promissory fraud" theory holds that a claim for payment becomes false because of fraudulent conduct by the contractor (or other party) prior to contract formation that induced the government to enter into the contract. These cases often involve conduct by contractors during the bidding or negotiation process such as collusive bidding; bid-rigging; contracts obtained based on false information, fraudulent pricing, or inflated cost estimates; or false representations about the ability to perform. Federal courts of appeals that recognize the fraud in the inducement theory of falsity include the Fourth, Fifth, Seventh, Eighth, and Ninth circuits.

Courts' recognition of the theory may stem in part from concerns that the government will ultimately pay higher prices for goods and services under fraudulently induced contracts. For example, many courts adopting the theory have invoked the Supreme Court's decision in United States ex rel. Marcus v. Hess . In that case, electrical contractors colluded to remove competition from the bidding process while certifying that their bids were genuine and not collusive. The Court wrote that

By their conduct, the respondents thus caused the government to pay claims of the local sponsors in order that they might in turn pay respondents under contracts found to have been executed as the result of the fraudulent bidding. This fraud did not spend itself with the execution of the contract. Its taint entered into every swollen estimate which was the basic cause for payment of every dollar paid by the [government].... The initial fraudulent action and every step thereafter taken pressed ever to the ultimate goal—payment of government money to persons who had caused it to be defrauded.

Courts also find support for the theory in a Senate committee report accompanying the 1986 amendments to the FCA. In this report, the committee wrote that "each and every claim submitted under a contract, loan guarantee, or other agreement which was originally obtained by means of false statements or other corrupt or fraudulent conduct, or in violation of any statute or applicable regulation, constitutes a false claim."

Allegations of Fraud in the Inducement by Underbidding

A special case of potential fraud in the inducement occurs when a contractor underbids the contract while intending to later seek an increase in the contract price. The Ninth Circuit has held that FCA liability may attach to a contractor's false initial cost estimates under a fraud in the inducement theory. In United States ex rel. Hooper v. Lockheed Martin Corp. , the relator alleged that Lockheed Martin knowingly underestimated its costs in order to win a cost-reimbursement contract for services related to modernizing hardware and software used for space launch operations. At the time the Air Force awarded the contract to Lockheed, it knew of the risk that costs would grow. Indeed, although Lockheed bid $432 million on the contract, the Air Force ultimately paid the company more than $900 million. Lockheed argued that it could not be held liable for making false initial cost estimates, even though Lockheed's management had allegedly told employees to lower their cost estimates without a sound basis, because these estimates amounted to statements of opinion rather than fact. The Ninth Circuit disagreed, holding that FCA liability may attach to false estimates, including "fraudulent underbidding in which the bid is not what the defendant actually intends to charge" when the other elements for FCA liability are satisfied.

A few court decisions provide further insight into this theory of fraud in the inducement. Although submission of inflated bids by contractors may cause the government to spend more money than it would have in a fair and open marketplace, some courts have recognized that underbidding may result in higher costs for the government only if the contractor seeks price adjustments above the bid price. Thus, one district court has held that an intentionally undervalued bid may not render claims for payment under a fixed-price contract false under an inducement theory unless the contractor subsequently seeks adjustments beyond the bid price to which it is not entitled. This holding acknowledges that contractors may "buy-in," or deliberately offer below-cost prices to get an award, hoping that it will lead to future work with a government agency. In addition, a contractor might request a price adjustment under a contract for various reasons other than to defraud the government, including that the government has added work to the contract during performance because of changed needs or unforeseen circumstances.

Other Examples

Decisions by federal courts in FCA cases illustrate the use of the fraud in the inducement theory in civil lawsuits against contractors. These cases involve allegations that a contractor has submitted a claim for payment after inducing the government to enter into the contract by underbidding the contract, engaging in bid rigging, or participating in collusive bidding. In addition, parties have alleged that inducement occurred as a result of false representations made by the contractor about the characteristics of a product, such as its effectiveness and safety; performance of the contract; record of business ethics or lack of conflicts of interest; compliance with the preconditions of contract award; compliance with labor laws and regulations; financial health; and discounts offered to commercial customers.

Limitations on the Theory

As with the implied certification theory, some courts have limited plaintiffs' use of the fraud in the inducement theory. A couple of courts in the Fourth Circuit have imposed limitations that appear to be intended to prevent ordinary breaches of contract from becoming FCA violations. For example, at least one court has held that a plaintiff must allege that the contractor made a false statement in an invoice or claim for payment (rather than merely during the course of bidding or negotiations) for allegations to rise above breach of contract. In the Fourth Circuit, a statement may not be false under the FCA if the plaintiff simply alleges neglect of contractual duties or if contract terms are ambiguous and admit of various interpretations.

Courts have also required that a false record or statement that allegedly induced the contract be material to the government's decision to pay the claim. This may require a causal connection between the alleged false records or statements and the submission or payment of a claim. Allegations that payment of a kickback has tainted a contract in the absence of a showing that this conduct increased the contract price may be insufficient to state a claim under the FCA.

Courts have also required that the defendant knowingly took the action that allegedly induced the contract. At least one court has inferred the requisite intent when "substantial nonperformance" of contractual duties occurs promptly after contract formation. For liability to attach to a promise that allegedly induced a contract, the "promise must be false when made." In limited circumstances, government knowledge of a contractor's inaccurate statements prior to the government's payment of a contractor's claim may lead a court to find that the contractor did not knowingly induce a contract by fraud under the FCA. In addition, some courts have found that a contractor may lack the requisite knowledge when it has made a plausible but erroneous interpretation of the contract "absent some specific evidence of knowledge that the claim is false or of intent to deceive," at least when the interpretation is not unreasonable.

Finally, several courts have required plaintiffs pleading falsity under the fraud in the inducement theory to comply with Federal Rule of Civil Procedure 9(b). Generally, this means that the plaintiff must set forth the circumstances surrounding the alleged inducement with particularity. At least one court has held that a plaintiff may not plead fraud in the inducement based on a contractor's failure to disclose information unless the plaintiff alleges that a law or other source explicitly requires disclosure.

Calculating Treble Damages

In addition to disagreeing about the proper scope of liability under the FCA, courts of appeals have different views about the proper method for calculating treble damages under the act when the defendant (e.g., a contractor) has provided some value to the government. The FCA states that, in addition to a civil penalty, a "person" violating the FCA is liable for "[three] times the amount of damages which the Government sustains because of the act of that person." The act does not specify how courts should calculate this amount. Federal courts of appeals have developed two methods of calculating treble damages in this situation that may result in significant differences in damages. The Seventh Circuit Court of Appeals has referred to these methods as the "net trebling" and "gross trebling" approaches.

A decision by the Seventh Circuit illustrates the differences in these two approaches. In United States v. Anchor Mortgage Corp. , the district court found that a company and its chief executive officer had knowingly provided false information when applying for federal guarantees of home mortgage loans. In calculating damages, the district court applied the "gross trebling" approach. It trebled the damages that the government had suffered from paying lenders under the guarantees on the defaulted loans and then deducted the amounts the government recovered from selling the properties that secured the loans. On appeal, the Seventh Circuit reversed the district court's damages award and held that the district court should have employed the "net trebling" approach. Under this method, the district court should have subtracted the amount that the government realized from sale of the collateral properties from the amount the government paid to lenders under the loan guarantees before trebling the damages.

The Seventh Circuit sought to justify use of the "net trebling" approach by arguing that calculating damages using net loss is the "norm" in common law contract cases. Courts in these cases have often measured damages using the difference between the market price and contract price. Thus far, most courts of appeals that have considered the issue favor the "net trebling" approach.

Contract Disputes Act Anti-Fraud Provision

The Contract Disputes Act of 1978 (CDA) provides administrative and judicial procedures for the resolution of disputes between the government and contractors involving certain contracts awarded by executive agencies. In part because of concerns that contractors would submit inflated claims during contract disputes as a "negotiating tactic," Congress added a provision to the CDA imposing a penalty for unsupported claims.

The Federal Circuit's recent decision in Daewoo Engineering Co., Ltd. v. United States demonstrates that the CDA's anti-fraud provision may result in a significant civil penalty for a contractor when it submits a fraudulent claim to the government during a contract dispute in order to extract a settlement.

Overview of the CDA

Congress passed the CDA in 1978 in order to provide a fair and efficient system for the resolution of claims and disputes involving contracts awarded by executive agencies. The CDA's dispute provisions apply to most express or implied-in-fact contracts made by executive agencies for the procurement of property (other than real property in being) or services; construction, alteration, repair, or maintenance of real property; or the disposal of personal property. Generally, if parties cannot settle a dispute arising under, or relating to, a contract, the prime contractor or the government submits a claim to the contracting officer for decision. When a contractor's claim exceeds $100,000, the contractor or other authorized individual must certify that, among other things, the claim is made in good faith and that "the amount requested accurately reflects the contract adjustment for which the contractor believes the Federal Government is liable."

The contracting officer's decision on the claim (or a deemed denial because of the officer's failure to decide) becomes final unless the contractor lodges an appeal of an adverse decision within 90 days of the decision to the proper agency board of contract appeals, or files suit within 12 months in the COFC. Generally, the contractor—or the agency head with Attorney General approval—may appeal decisions of an agency board of contract appeals or the COFC to the U.S. Court of Appeals for the Federal Circuit. Ultimately, the Supreme Court could grant certiorari.

Anti-Fraud Provision

The CDA contains an anti-fraud remedy primarily because of concerns that contractors would submit inflated claims during contract disputes as a "negotiating tactic," leading the government to settle these claims instead of using its limited resources to evaluate them on the merits. During hearings on the CDA, Admiral Hyman G. Rickover testified that some Navy contractors had circumvented competitive bidding procedures by underbidding in order to win contracts and later submitting equitable adjustment claims to recover the amounts by which their costs exceeded their bid prices. Congress added the anti-fraud provision to the CDA in an effort to address these concerns and to supplement the government's remedies under the FCA and Forfeiture of Fraudulent Claims Act (FFCA) by making it so that "the larger the fraud attempted, the greater is the liability to the Government." The CDA's anti-fraud provision states that

If a contractor is unable to support any part of the contractor's claim and it is determined that the inability is attributable to a misrepresentation of fact or fraud by the contractor, then the contractor is liable to the Federal Government for an amount equal to the unsupported part of the claim plus all of the Federal Government's costs attributable to reviewing the unsupported part of the claim. Liability under this paragraph shall be determined within 6 years of the commission of the misrepresentation of fact or fraud.

Agency boards of contract appeals and contracting officers generally lack jurisdiction over fraud claims brought under the CDA's anti-fraud provision. However, the COFC has jurisdiction over government counterclaims brought under the CDA's anti-fraud provision regardless of whether the contracting officer has issued a final decision on the CDA claim.

The CDA defines "misrepresentation of fact" as "a false statement of substantive fact, or conduct that leads to a belief of a substantive fact material to proper understanding of the matter in hand, made with intent to deceive or mislead." The government must prove falsity and intent by a preponderance of the evidence. The statute of limitations for government claims against a contractor under the CDA's anti-fraud provision is six years after the claim accrues.

Although courts have interpreted the CDA's anti-fraud provision in only a few cases, the Federal Circuit and Court of Federal Claims have suggested ways in which a contractor may avoid liability under the provision. For example, a contractor could potentially avoid liability by taking "reasonable steps to verify the claim." In addition, a contractor that submits a claim based on a plausible legal interpretation of a contractual provision may avoid liability even if a court finds that the interpretation is incorrect "absent some specific evidence of knowledge that the claim is false or of intent to deceive." If a contractor remains unsure about the proper interpretation of a contract, the Federal Circuit has indicated that the contractor should ask the government for clarification.

Daewoo Engineering and Construction Co., Ltd. v. United States

The Federal Circuit Court of Appeals' decision in Daewoo Engineering Co., Ltd. v. United States demonstrates that the CDA's anti-fraud provision may result in a significant civil penalty for a contractor that submits a fraudulent claim to the government without taking steps to verify and justify its certified claim. In this case, the United States Army Corps of Engineers (USACE) awarded Daewoo a contract to build a road in the Republic of Palau. In order to build the road, Daewoo had to compact moist soil in rainy weather, which posed a significant challenge within the agreed upon time constraints. Daewoo experienced several problems with compacting the soil, leading it to fall behind schedule in its performance of the contract.

As its contract performance problems continued, Daewoo filed a certified CDA claim with the contracting officer seeking a $64 million increase in the contract price. Daewoo alleged that the contract contained a "misleading weather-delay clause;" that the government had withheld "superior knowledge" about its "weather-delay calculation methods;" and that the contract was impossible to perform, among other things. Daewoo's claim included incurred costs of about $13 million and projected costs of about $50 million. When the contracting officer denied Daewoo's claim, the company brought suit against the government in the COFC for almost $64 million in damages, arguing that the USACE had misrepresented the extent of poor weather conditions at the construction site. The United States asserted that the contractor's claim was fraudulent and sought penalties and forfeitures in counterclaims under the FCA, the CDA's anti-fraud provision, and the Forfeiture of Fraudulent Claims Act (FFCA).

Court of Federal Claims' Decision

The COFC first considered Daewoo's CDA claims and rejected them. Next, the COFC considered the government's fraud counterclaims. It found Daewoo liable under the CDA's anti-fraud provision because Daewoo had acted in bad faith by using its claim as a "negotiating ploy" to extract a settlement offer from the government without believing that the government actually owed it $50 million in projected costs. The COFC entered judgment for the government for $50 million for the CDA violation, and held that Daewoo's claims under the contract were forfeited pursuant to the FFCA (although it had not found them to be supported anyway). However, the COFC entered judgment for the government for only $10,000 for the contractor's FCA violation because the court could not establish that the government had suffered losses. Daewoo appealed to the Federal Circuit.

Federal Circuit Court of Appeals' Decision

On appeal before the Federal Circuit, Daewoo raised two main arguments. First, the contractor maintained that it had not made a "claim" under the CDA for the $64 million in total costs because it did not seek the funds as a "matter of right" but rather presented the number as an estimate "to encourage the government to adjust the contract specifications." The Federal Circuit rejected this argument, declining to find the lower court's factual determination that Daewoo had made a "claim" for these costs to be clearly erroneous, in significant part because of testimony by Daewoo's project manager confirming that Daewoo had made a $64 million claim.

Next, Daewoo argued that even if it had made a "claim" for the $50 million in projected costs, the claim was not fraudulent. The Federal Circuit rejected this argument as well, and, like the COFC, held that Daewoo had committed fraud. However, the appeals court reached this result for slightly different reasons than the lower court. The Federal Circuit held that Daewoo had committed fraud because the contractor's calculation of its claim for $50 million in projected costs "assumed the government was responsible for each day of additional performance beyond the original 1080-day contract period, without even considering whether there was any contractor-caused delay or delay for which the government was not responsible." In addition, the appeals court noted that Daewoo did not use outside experts to calculate the amount of its claim and neglected to explain how it arrived at the claimed amount during trial. Finally, Daewoo had certified that the claim was accurate and made in good faith. In upholding the $50 million penalty under the CDA's anti-fraud provision, the Federal Circuit rejected Daewoo's arguments that the penalty violated the Eighth and Fifth amendments of the U.S. Constitution.

Other Examples

Other examples of cases in which the government has alleged that a contractor violated the CDA's anti-fraud provision have involved a contractor's purported submission of false, inflated, or duplicative claims, including when the contractor allegedly misrepresented costs under a contract, sought payment for products that did not conform with specifications, misrepresented that it was an approved source, or misrepresented its eligibility to perform the contract.

Forfeiture of Fraudulent Claims Act

The Forfeiture of Fraudulent Claims Act (FFCA), or "special plea in fraud" statute, generally allows the government to assert a counterclaim seeking forfeiture of fraudulent claims brought against it in the COFC. This penalty exists as a condition of the government's waiver of its sovereign immunity from suit. Congress enacted the FFCA as part of an 1863 law that granted new powers to the Court of Claims. The FFCA states that "A claim against the United States shall be forfeited to the United States by any person who corruptly practices or attempts to practice any fraud against the United States in the proof, statement, establishment, or allowance thereof."

In such cases the United States Court of Federal Claims shall specifically find such fraud or attempt and render judgment of forfeiture.

Judicial interpretations have clarified the elements of the special plea in fraud, as well as its mental state requirement, burden of proof, and application. The Federal Circuit has held that the government must prove that the contractor knowingly submitted a false claim with an intent to defraud it, and thus the government does not have to show that it relied on the claim or suffered injury from it. The burden of proof for the government is "clear and convincing evidence," a higher standard than preponderance of the evidence. Under the FFCA, if the court finds part of a claim under a contract to be fraudulent and submitted with the requisite mental state, the court must render judgment of forfeiture on all claims under that contract. At least one court has sought to justify such a holding on the grounds that separating the claims tainted by fraud from those untainted by fraud is impossible.

A few significant disagreements over the proper interpretation of the FFCA have arisen over the years. For example, courts disagree about whether fraud sufficient for forfeiture may involve fraud in connection with the execution or performance of the contract in addition to fraud related to submission of a claim. The Federal Circuit appears to have recently held that the government may establish a violation of the FFCA only when the alleged fraud relates to the submission of a claim, stating that the "neighboring provisions illustrate that the forfeiture statute is best understood as a companion requirement of claims procedure rather than a catch-all anti-fraud provision." Courts also disagree over whether the FFCA is subject to the general statute of limitations for claims over which the COFC has jurisdiction.

A few recent examples of cases in which the government has sought forfeiture of a contractor's claims because of purported fraudulent conduct include allegations that the contractor submitted "several inconsistent explanations for its added costs" and knowingly claimed unrecoverable lost profits; used amounts in purchase orders as actual costs in its claim when related invoices showed lower costs; and asserted that it was an approved source to obtain two purchase orders.

Program Fraud Civil Remedies Act

The Program Fraud Civil Remedies Act (PFCRA) provides an administrative process under which certain federal agencies may obtain civil remedies and assessments from "persons" who knowingly make false, fraudulent, or fictitious claims or statements to the agencies. The act's legislative history suggests that Congress intended the PFCRA to remedy the "small-dollar cases" of fraud that the Department of Justice (DOJ) had declined to pursue in court because of litigation costs. Thus, an agency may not use the administrative process contained in the PFCRA when the amount of money, property, or services demanded in a claim (or group of related claims) exceeds $150,000.

The PFCRA shares some structural similarities with the FCA. Like the FCA, it allows for the imposition of civil penalties on violators for false claims or statements, as well as an assessment on violators when the government has paid the claim. As with the FCA, liability under the PFCRA requires no specific intent to defraud, and thus a party may violate the FCA when it acts with reckless disregard of a claim or statement's truth or falsity.

However, unlike the FCA, the PFCRA establishes a mostly administrative process for recovery of civil remedies rather than a judicial one. The PFCRA provides for agency officials to investigate and review allegations of false claims or statements and ultimately requires the approval of a certain official from DOJ for the case to be referred to an Administrative Law Judge or other hearing officer. The act provides the person alleged to be liable with notice and the opportunity for a hearing on the record. The agency must prove its allegations by a preponderance of the evidence. A decision on liability or damages by the hearing officer may be appealed to the agency head within 30 days after the hearing officer issues a written decision, and, ultimately, to federal district court within 60 days of the agency head's decision.

Few federal agencies use the PFCRA, according to a recent study by the Government Accountability Office (GAO). The study found that from FY2006 through FY2010, five civilian agencies referred 141 cases to DOJ for approval. Of these cases, the U.S. Department of Housing and Urban Development referred 135, or 96 percent. A 2008 report by the National Procurement Fraud Task Force recommended several reforms to the PFCRA designed to increase its use by federal agencies and its effectiveness at deterring fraud. These reforms include incentivizing agencies to use the PFCRA by increasing the act's jurisdictional cap to $500,000 and the civil penalty limit to $15,000; allowing agencies to retain recovered funds instead of depositing them into the Treasury Miscellaneous Receipts account; and simplifying the act's procedural requirements.

Recent Regulatory Developments

This section briefly considers two recent regulatory developments that may affect contractors' potential exposure to civil liability and/or damages under the FCA. Among other things, the Mandatory Disclosure Rule allows an agency to suspend or debar a contractor for failing to timely disclose to the government certain violations of federal law related to a contract or subcontract, including violations of the FCA. Generally, the Presumed Loss Rule states that when a business willfully misrepresents its size or status in order to obtain certain small business contracting preferences, there is a presumption that the United States has suffered losses equal to the amount that the government has spent on the contract.

Mandatory Disclosure Rule

In part to implement a statutory mandate contained in the Supplemental Appropriations Act of 2008, the Civilian Agency Acquisition Council and the Defense Acquisition Regulations Council (the Councils) amended the FAR to, among other things, require contractors to disclose certain violations of federal law related to a contract or subcontract. This "Mandatory Disclosure Rule" allows an agency to suspend or debar a contractor for

Knowing failure by a principal, until 3 years after final payment on any Government contract awarded to the contractor, to timely disclose to the Government, in connection with the award, performance, or closeout of the contract or a subcontract thereunder, credible evidence of—

(A) Violation of Federal criminal law involving fraud, conflict of interest, bribery, or gratuity violations found in Title 18 of the United States Code;

(B) Violation of the civil False Claims Act (31 U.S.C. 3729-3733); or

(C) Significant overpayment(s) on the contract, other than overpayments resulting from contract financing payments as defined in [48 C.F.R. §32.001].

Many government contracts must now include language requiring contractors to, among other things, timely disclose civil FCA violations related to the contract (or a subcontract under the contract) when the contractor has "credible evidence" that a principal of the contractor or one of certain other parties has committed such a violation. The provision states that disclosure must be made in writing to the relevant agency Office of the Inspector General and contracting officer.

During the rulemaking for the Mandatory Disclosure Rule, commenters expressed concerns that contractors would have difficulty in disclosing violations of the civil FCA because courts have reached different conclusions about what kind of conduct constitutes a violation. The Councils responded that "[g]enuine disputes over the proper application of the civil FCA may be considered in evaluating whether the contractor knowingly failed to disclose a violation of the civil FCA." Commenters also argued that mandatory disclosure of violations would facilitate lawsuits against contractors by qui tam relators. The Councils responded that "[t]imely disclosure of a knowing violation offers the contractor an opportunity to demonstrate its present responsibility to avoid suspension or debarment, and to obtain a reduction in damages under the civil FCA."

Presumed Loss Rule

Businesses that fraudulently obtain sole-source or set-aside contracts by misrepresenting their size or status prevent legitimate small businesses from receiving these contracts. In 2010, Congress amended the Small Business Act in an effort to address this issue. The SBA implemented these amendments in a 2013 rule.

The "Presumed Loss Rule," which is codified throughout Title 13 of the Code of Federal Regulations , states in part that when a business willfully misrepresents its size or status in order to establish its eligibility for award of a contract or subcontract "set aside, reserved, or otherwise classified as intended for award to" business concerns with a particular size or status, there is a presumption that the United States has suffered losses equal to the amount that the government has spent on the contract. A business is deemed to have made a willful certification of business size or status when it (1) submits a bid, proposal, or offer for a federal contract or subcontract set-aside or reserved for businesses of a particular size or status; (2) submits a bid, proposal, or offer for a federal contract or subcontract that "in any way encourages a Federal agency to classify the bid or proposal, if awarded, as an award to" a business of a particular size or status; or (3) registers on a federal electronic database as a business of a particular size or status in order to be considered for award of a federal contract or subcontract. The rule allows a trier of fact to determine that the presumption of loss does not apply in certain situations, such as when the contractor's misrepresentations stem from unintentional errors.

The Presumed Loss Rule may have significant implications in FCA suits in which the government or a relator alleges that a contractor fraudulently induced the government to award the contractor a set-aside or sole-source contract by misrepresenting its size or status, or that a contractor made an implied false certification by submitting a claim for payment after having failed to comply with federal regulations governing size or status representations. In the past, the COFC has declined to impose damages when the contractor failed to comply with the eligibility requirements of the SBA's 8(a) Program. The court stated that "damages represent compensation for a loss or injury sustained" and that, because the government "got essentially what it paid for," the government had not suffered damages as a result of the contractor's failure to comply with the eligibility requirements. Under the Presumed Loss Rule, however, a court facing the same set of facts would probably hold the contractor liable for three times the amount that the government paid on the contract.

Conclusion

Preventing contractor fraud without deterring contractors' willingness to compete for government contracts poses a challenge for the federal government because fraud takes a variety of forms and can be difficult to detect and prosecute with limited resources. Several federal statutes allow the federal government—and in some instances, private parties—to recover damages, civil penalties, or forfeitures for false or fraudulent claims for payment and other misconduct. Some Members of Congress, courts, and others have continued to debate the proper scope of liability under these civil fraud statutes. Congress may enact laws that alter the scope of these statutes and, at least with respect to the FCA, has done so many times.

Much of the debate about the scope of fraud statutes has focused on the FCA, the federal government's primary civil fraud remedy. Two recent court-created theories have further expanded the scope of defendants' liability under the FCA —a statute which the Supreme Court has characterized as imposing "damages that are essentially punitive in nature." Some commentators have expressed concerns that judicial recognition of these theories could allow the government or relators to recover tort-like damages for defendants' minor breaches of contract. However, some of the courts that recognize these theories have limited their use by strictly enforcing the FCA's mental state requirement; the heightened pleading requirements for fraud allegations under Federal Rule of Civil Procedure 9(b); or some form of materiality requirement. Other recent regulatory and judicial developments may also affect contractors' potential exposure to civil liability and damages under the FCA.

Contractors' submission of fraudulent claims during the contract disputes process poses additional challenges for the government. Federal statutory civil remedies for this type of contractor fraud exist as a condition of the government's waiver of its sovereign immunity from suit, and as a means of deterring fraud against federal agencies that lack the resources to thoroughly evaluate contractor claims that may have been submitted in an effort to extract a settlement offer from the government. Fair resolution of contract disputes by courts, including resolution of government counterclaims alleging fraud, helps ensure that contractors will continue to compete for the government's business.