potential for liability company’s mitigating your (fca
TRANSCRIPT
False Claims Act (FCA):
Mitigating Your Company’s
Potential For Liability
2
Looking Ahead
§Why is there a False Claims Act?
§What sort of conduct does it prohibit?
§How do these cases come about?
§What actions result in liability?
§What are some new priorities for enforcement?
§What can you do to minimize the likelihood of these violations?
3
False Claims Act History
§Original statute dates back to Civil War – Signed by Lincoln
§Enacted to prevent fraudulent war profiteering (e.g. decrepit horses, sick mules, faulty rifles and ammunition)
§Multiple amendments since that time.
§Codified at 31 U.S.C. §§ 3729 et. seq.
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What Conduct is Prohibited?
§ The statute prohibits seven types of conduct (the most frequently litigated issues in red):
1. Submitting or causing someone to submit false or fraudulent payment or approval claims
2. Creating or causing someone to create or use false records or statements in support of fraudulent claims
3. Conspiring to violate the FCA
4. Delivering or causing someone to deliver less property or money than is owed to the Government
5. Creating and submitting a false receipt of property used (& to be used) by the government;
6. Knowingly receiving property from an official not authorized to pledge such property
7. Falsifying records or causing someone to falsify records to avoid or decrease an obligation to pay or provide money or property to the Government
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What Conduct is Prohibited? (cont.)
§Some common violations include:
§ certifying compliance with an unfulfilled contract requirement
§ overbilling the Government
§misrepresenting company as a small business or allowing pass-throughs for a large company
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What Conduct is Prohibited? (cont.)
§ A few ways that this may come up include:
§ Contractor Agrees to Pay $5.275 Million to Settle False Overtime and Premium Pay Allegations
§ Environmental Remediation Firm Agrees to Pay $2.72 Million to Settle Claims of Alleged Bid-Rigging and Kickbacks
§ Subcontractor Agrees to Pay $2.0 Million to Settle Allegations related to its Role in a Small Business Fraud
§ Multiple Contractors Agree to Pay a Combined $57.75 Million and Use Independent Corporate Monitors for Three Years to Resolve Claims of Overcharging the DoE for a Decade by Billing Time Not Worked
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The Basics
§ Government can bring an FCA action itself
§ But, an action can also be brought by a private party, referred to as a “relator”, via a “qui tam” action.
§ Potentially very lucrative for these whistleblower private parties.
§ 15-25% of proceeds if the Government intervenes
§ 25-30% of proceeds if the Government does not.
§ After relator files suit in federal court, Government has 60 days to investigate the allegations.
§ Then, the Government informs the relator of its choice. If the Government intervenes, the DOJ takes over the case. If they do not, the relator can continue.
§ Much of the qui tam process and the Government’s investigation happens under seal.
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The Basics (cont.)
§ These charges are very expensive and very painful as a defendant.
§ Civil Penalties (currently $11,665 to $23,331 per claim)
§ Treble Damages (i.e., three times the amount of damages from the fraudulent act)
§ If successful, also owe the whistleblower their legal fees (in addition to your own)
§ Terminations, Suspension, and Debarment.
§ $2.2 Billion in judgments & settlements in FY 2020 (about a Billion less than last year’s numbers)
§ Most of the judgments & settlements were still in Healthcare ($1.8 Billion in FY 2020), but DOJ specifically highlighted its efforts to combat procurement fraud in the DoE in its annual report on FCA for FY 2020.
§ DOJ’s new actions against non-defense federal contractors up significantly in FY 2020, i.e., 33% more non-qui tam actions (104 in FY 2020) and 22% more qui tam actions (181 in FY 2020). DOJ’s new actions against federal contractors were up 20% in FY 2020, with significant growth (more than double) in non-qui tam actions.
§ Government applies the False Claims Act broadly.
§ But a significant majority of cases are still brought by qui tam relators.
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What Makes Someone Liable?
1. Direct False Claim – liability for knowingly making an affirmative false claim to the U.S. Government or concealing or avoiding an obligation to pay.
2. Express False Certification – liability for expressly certifying compliance with a required contract provision, statute, regulation, or governmental program in connection with a false claim.
3. Implied False Certification – liability by implication, but without any express certification of compliance with a required contract provision, statute, regulation, or governmental program in connection with a false claim.
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Do All False Claims Become Violations?
§ No. The False Claims Act prohibits actions of submitting or causing a submission of false claims (statements, records, etc.) that are done with the knowledge of falsity.
§ But, of course, knowledge is interpreted broadly.
§ actual knowledge;
§ deliberate ignorance of the truth or falsity of the information; or
§ reckless disregard of the truth or falsity of the information.
11
Universal Health Services, Inc. v. US ex rel. Escobar (2016)
§ A teenage girl dies after being diagnosed with bipolar disorder and prescribed a certain medication during treatment at a mental health facility in Massachusetts.
§ The practitioners treating the teenager turn out to be unlicensed medical professionals without the authority to prescribe medications. One practitioner had a degree from an unaccredited internet institution.
§ Parents file a qui tam FCA suit against Universal Health (owner of the facility) for submitting reimbursement claims to Medicaid for services they were not licensed to provide.
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Universal Health Services, Inc. v. US ex rel. Escobar (2016)
§ Unanimous Decision (by eight justices)
§ The Supreme Court held that an implied false certification can create liability under the FCA, at least in some circumstances.
§ Though two conditions need to be satisfied:
1. The claim must not merely request payment, but must also make specific representations about the goods or services provided.
2. Defendant’s failure to disclose noncompliance with material statutory, regulatory, or contractual requirements makes those representations misleading half-truths.
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Universal Health Services, Inc. v. US ex rel. Escobar (2016)
§ Established that the standard for materiality is rigorous.
§ The Supreme Court provided some guidance:
§ The alleged misrepresentation must be “material to the Government’s payment decision.”
§ The FCA is not an “all purpose antifraud statute” or a vehicle to punish “garden-variety breaches of contract or regulatory violations.”
§ “We reject [the] assertion that materiality is too fact intensive for courts to dismiss a False Claims Act case on a motion to dismiss or at summary judgment.”
§ The fact that the provision is labeled as a condition of payment is relevant, but not dispositive.
§ “Nor is it sufficient for a finding of materiality that the Government would have the option to decline pay if it knew of the defendant’s noncompliance.” What matters is what the Government did or would have done.
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Universal Health Services, Inc. v. US ex rel. Escobar (2016)
§ The decision even referenced some potential examples of materiality proof:
§ “[E]vidence that the Government consistently refuses to pay claims in the mine run of cases based on noncompliance with the particular statutory, regulatory or contractual requirement.”
§ “[I]f the Government pays a particular claim in full despite its actual knowledge that certain requirements were violated, that is very strong evidence that those requirements are not material.”
§ “Or if the Government regularly pays a particular type of claim in full despite actual knowledge that certain requirements were violated, and has signaled no change in position, that is strong evidence that requirements are not material.”
§ Note that the examples suggest a focus on the customary practices of the Government. They are not limited to the defendant alone. Treatment of other contractors matters.
§ The Supreme Court views materiality standard in FCA as similar to the standards they employ for other federal fraud statutes.
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Recent Priorities for Enforcement
§ COVID-19 Relief (e.g., Paycheck Protection Program) Fraud
§ Antitrust Crimes
§ In 2019, DoJ formed a Procurement Collusion Strike Force (PCSF) to address antitrust crimes (e.g., bid-rigging, collusion, price-fixing) in federal procurement.
§ GAO’s High Risk List: DOE’s contract and project management for National Nuclear Security Administration (NNSA) and Office of Environmental Management (EM)
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FAR 52.203-13 Mandatory Disclosure Rule
§ This clause applies when contract value is above $6 million and period of performance extends beyond 120 days. It imposes several MAJOR requirements:
§ Contractors have to establish a written code of business ethics and conduct within 30 days after contract award and make a copy available to all employees.
§ Contractors have to exercise due diligence to prevent and detect criminal conduct.
§ Contractors have to otherwise promote an organizational culture that encourages ethical conduct and a commitment to compliance with the law.
§ Each Contractor “shall timely disclose, in writing, to the agency Office of the Inspector General (OIG), with a copy to the Contracting Officer, whenever, in connection with the award, performance, or closeout of this contract or any subcontract thereunder, the Contractor has credible evidence that a principal, employee, agent, or subcontractor of the Contractor has committed-
§ A violation of Federal criminal law involving fraud, conflict of interest, bribery, or gratuity violations found in Title 18 of the United States Code; or a violation of the civil False Claims Act.”
§ Contractors have to flow down this clause in subcontracts that have a value in excess of $6 million and a performance period of more than 120 days.
§ Contractors have to establish an ongoing business ethics awareness and compliance program
§ Contractors have to implement an internal control system that will establish standards and procedures to facilitate timely discovery of improper conduct in connection with government contracts and ensure corrective measures are promptly instituted and carried out.
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FAR 52.203-13 Mandatory Disclosure Rule (cont.)
Failure to meet any of these requirements is itself a violation of the contract.
Failure to meet any of these requirements is also likely to result in a false claim itself.
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An ounce of prevention…
§ Compliance with these obligations is key. But there are things that you can do to protect your company:
§ Be selective in choosing your employees, subcontractors, vendors, suppliers, etc.
§ Always make sure that you understand what it is that you are certifying.
§ Set up a compliance program.
§ Don’t retaliate if someone reports misconduct.
§ Ensure that your invoices, claims, and other submissions undergo more than one level of internal review.
§ Have employees certify their own compliance with the policies.
§ Review your policies and procedures periodically to confirm that the compliance is ongoing.
§ Don’t let issues fester.
The FAR/DFARS Early Year Review
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Looking Ahead – Top 5 Changes
The FAR…
1. Limits the Use of LPTA
2. Plans to Get Rid of the Term “Commercial Items”
3. Amends the “Buy American” Domestic Preference Rules?
The DFARS…
1. Implements New Cyber-Security Requirements (CMMC and NIST-assessments)
Section 3610 – CARES Act.
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The FAR: Limits on the Use of LPTA
86 Fed. Reg. 3679 - Restrictions on Use of Lowest Price Technically Acceptable Source Selection Process (implements NDAA 2019)
Effective: February 16, 2021
§ Adds FAR 15.101-2, Lowest Price Technically Acceptable Source Selection Process
§ Does NOT prohibit the use of LPTA in all cases.
§ But requires non-DoD Contracting Officers to avoid LPTA, to the maximum extent practicable, in the case of a procurement that predominantly acquires:
(1) Information technology services, cybersecurity services, systems engineering and technical assistance services, advanced electronic testing, audit or audit readiness services, health care services and records, telecommunications devices and services, or other knowledge-based professional services;
(2) Personal protective equipment; or
(3) Knowledge-based training or logistics services in contingency operations or other operations outside the United
States, including in Afghanistan or Iraq.
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Limits on the Use of LPTA(cont.)
Requires non-DoD Contracting Officers to make sure each of the below is true before using LPTA in ANY CASE:
(1) Minimum requirements can be described clearly and comprehensively in terms of performance objectives, measures, and standards that will be used to determine the acceptability of offers ;
(2) No, or minimal, value will be realized from a proposal that exceeds the minimum technical or performance requirements;
(3) The proposed technical approaches will require no, or minimal, subjective judgment by the source selection authority as to the desirability of one offeror’s proposal versus a competing proposal ;
(4) The agency has a high degree of confidence that reviewing the technical proposals of all offerors would not result in the identification of characteristics that could provide value or benefit ;
(5) The agency determined that the lowest price reflects the total cost, including operation and support, of the product/service being acquired; and
(6) The contracting officer documents the contract file describing the circumstances justifying the use of the lowest price technically acceptable source selection process.
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Limits on the Use of LPTA(cont.)
§ These LPTA restrictions apply to:§ Negotiated procurements;§ Simplified Acquisitions;§ Commercial items acquisitions; and § Orders placed under multiple award indefinite delivery contracts.
§ “GSA will separately address, outside of this rule, the applicability of [these limits to Orders under GSA’s] Federal Supply Schedules (FSS) Program.”
§ Remember that Similar (but not Identical) Restrictions on LPTA Use by the DoD Already Exist in the DFARS.
84 Fed. Reg. 50785 - Restrictions on Use of Lowest Price Technically Acceptable Source Selection Process (implements NDAAs 2017 and 2018)
Effective: October 1, 2019
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The FAR: No More “Commercial Items”?
85 FR 65610 - Revision of Definition of “Commercial Item”(implements NDAA 2019)
In Proposed Rule Stage / Issued: October 15, 2020
§ Replaces the term “Commercial Item” (which addressed both Items and Services) with two new terms:
§ “Commercial Product”
§ “Commercial Service.”
§ The new terms still relate to “Items” (now termed “Products”) customarily used, offered or available to the general public and “services” in support of such items or that are offered in the commercial marketplace.
§ But the Proposed Rule will separate provisions relating to “Products” and “Services” throughout, especially FAR Part 12.
§ This change resolves issues with inconsistent interpretations of policy and confusion over how to identify eligible commercial products and services.
§ Not intended to affect the universe of products or services that the Government may procure with FAR Part 12, or any contractor obligations.
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The FAR: Stricter Buy American Preferences
86 Fed. Reg. 6180 – Maximizing Use of American-Made Goods, Products, and Materials (implements former President Trump’s Executive Order No. 13881)
Applicability: Final Rule. Solicitations issued on or after February 22, 2021 and resultant contracts.
§ Applies only to domestic preferences for the “Buy American” policies. But changes the “component” test for whether an item is a “domestic end product” :
Previously, FAR Part 25 required…
1. The end-product must be manufactured in the United States, and
2. More than 50% of the cost of all of the component parts must also be manufactured in the United States.
Now, the FAR requires…
1. The end-product must be manufactured in the United States, and
2. More than 55% of the cost of all of the component parts must also be manufactured in the United States, except for those end products that consist “wholly or predominantly of iron or steel or a combination of both”, or
3. For those end products that consist “wholly or predominantly of iron or steel or a combination of both,” more than 95% of the cost of all of the component parts must also be manufactured in the United States (no more COTS-exception for this part of the test either).
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Stricter Buy American Preferences(cont.)
§ But remember, even if you can no longer satisfy the “component” test, other exceptions allowing the purchase of foreign-made end products may apply.
§ One of these exceptions allows purchases of foreign-made products if the cost of a domestic product is “unreasonable”. The Rule also changes the standards for calculating what is “unreasonable”:
Previously, FAR Part 25 identified the following to be unreasonable…
1. the lowest offer for a domestic product (comes from a large business) and is more expensive than a foreign product with the addition of a 6% escalation factor.
2. the lowest offer for a domestic product (comes from a small business) and is more expensive than a foreign product with the addition of a 12% escalation factor.
Now, the FAR identifies the following to be unreasonable…
1. the lowest offer for a domestic product (comes from a large business) and is more expensive than a foreign product with the addition of a 20% escalation factor.
2. the lowest offer for a domestic product (comes from a small business) and is more expensive than a foreign product with the addition of a 30% escalation factor.
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Stricter Buy American Preferences(cont.)
§ The Change in Administration and President Biden’s January 25, 2021 Executive Order No. 14005 suggest further revisions.
§ The new Administration imposed a regulatory freeze, which requested agencies to postpone the effective dates of any rules
published in the Federal Register for 60 days.
§ But the FAR already reflects the changes.
§ President Biden’s Executive Order 13881 also noted that the President Trump’s Executive Order that this Rule implements “is superseded only to the extent that it is inconsistent with the latest direction.”
§ So these specific updates are likely here to stay.
§ Some other things that we can expect based on President Biden’s Executive Order:
§ Changes to regulations addressing other preferences for products “Made in America.”
§ Tougher Stance on Waivers (including public reporting and a new Made in America office within OMB to oversee the waiver process and policy).
§ Focus on “Sources of Cost Advantage” (e.g., dumped or subsidized steel, iron, or manufactured goods) before granting waivers.
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DFARS: DoD’s New Cyber-Security Requirements
85 Fed. Reg. 61505 – Assessing Contractor Implementation of Cybersecurity Requirements / Effective: November 30, 2020
§ Premieres the DoD’s new two-pronged approach to cybersecurity:
§ The long-promised Cybersecurity Maturity Model Certification (CMMC); and
§ Assessments under the National Institute of Standards and Technology (NIST) Special Publication (SP) 800-171.
§ Both requirements will apply broadly to:
§ All DoD prime contractors and subcontractors;
§ Under all DoD solicitations and contracts, except for acquisitions solely for commercially available off the-shelf (COTS) items.
§ Both are required at the time of award (and even before option exercises, and extensions).
§ But most contractors are likely to feel the effect of the NIST Assessments first, because the NIST Assessments started becoming a part of solicitations and contracts on November 30, 2020. The CMMC standard will have a staggered roll-out (only 15 in FY 2021).
§ Other Agencies May Not Be Far Behind.
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DoD’s New Cyber-Security Requirements (cont.)
NIST SP 800-171 Assessments:
§ Merely Verifies Compliance with Pre-Existing Requirements of DFARS clause 252.204-7012, Safeguarding Covered Defense Information and Cyber Incident Reporting.
§ Focused on evaluating “the extent to which the company has implemented the requirements” only, rather than pros/cons of the chosen approach.
§ Prime contractors will have to ensure that their subcontractors comply with this requirement.
§ Three Types of Assessments. The Rule provides for three types of Assessments: Basic, Medium, and High.
§ Basic Assessment = Self-Assessment
§ The DoD will Administer any Medium and High Assessments itself. Contractors may appeal the DoD’s findings during these Assessments.
§ But all assessments will generally last for three years (unless high program risk or a security change occurs).
§ All assessments will have to be reported in the Supplier Performance Risk System (“SPRS”).
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DoD’s New Cyber-Security Requirements (cont.)
The CMMC Standard:
§ There Are No Self-Certifications for CMMC:
§ All assessments will be conducted by accredited CMMC Third Party Assessment Organizations (C3PAOs), which are accredited by the CMMC-Accreditation Body (AB). But again, there is a process for disputing findings of an assessment.
§ Only the CMMC-AB can provide the evaluated contractor with a certification.
§ CMMC-AB will document these certifications in SPRS system as well.
§ The certifications will again generally last for three years.
§ Prime contractors will have to ensure that their subcontractors comply with this requirement.
§ The CMMC Standards Involve Five Levels (building on the requirements of NIST-SP 800-171):
§ But most entities will only need CMMC Level 1-3 certificates during the initial rollout.
§ The DoD adds that contractors who do not process, store, or transmit Controlled Unclassified Information (CUI) will generally only require a CMMC Level 1 certification.
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CARES Act: Recovery of Certain COVID-19 Costs
Sec. 3610 of the Coronavirus Aid, Relief, and Economic Security (CARES) - Implemented in Various Agency-specific Clauses (e.g., DFARS 231.205-79 and DoE-specific clauses (PF 2021-15))
§ Congress has extended Sec. 3610 authority through March 31, 2021.
§ Although it is not the only method of obtaining recovery for impacts of COVID-19 – it is an important tool to keep in mind IF APPLICABLE.
§ The Agency Guidance is Critical to Understanding the Applications, But the Following Requirements are Statutory:
§ Provides Contracting Officers with authority to issue a modification to compensate contractors for any paid leave, including sick leave, provided to keep its employees and subcontractors in a ready state because of COVID-19.
§ Consideration is not required.
§ Payments limited to an average of 40 hours per week.
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Recovery of Certain COVID-19 Costs (cont.)
More statutory requirements:
§ The § 3610 adjustment would cover the costs for paid leave where, as a result of facility closures or other restrictions, a contractor finds itself in the following situation:
§ its employees cannot perform work on a site that has been approved by the Federal Government for contract performance, including any contractor-owned, contractor-leased, federally-owned, or federally-leased sites;
§ its employees also cannot telework because their jobs cannot be performed remotely; and
§ where the contractor has to act to keep those employees in a ready state (presumably by continuing to pay those employees).
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Recovery of Certain COVID-19 Costs (cont.)
§ Agency Guidance Hints at Other Things to Keep in Mind:
§ Applies to Both Contractors and Subcontractors.
§ Duplicate Recovery Will Be Prohibited.
§ Adjustments Will Be Reduced for Any Credits That the Contractor Receives for the Claimed Costs (e.g., via the Paycheck Protection Program (PPP) loans or Families First Coronavirus Response Act (FFCRA) credits)).
§ Certain Representations Are Often Required for Recovery, such as a certification “that the contractor has not or will not pursue reimbursement for the same costs accounted for under its request, to support its requests for reimbursement under Section 3610.”
§ Documenting and Segregating Increased Costs is Critical to Recovery.
§ Reimbursements Are Generally Available for Any Contract Type (including those with incentive provisions).
§ Reimbursements may not include any profit or fee.
§ Early Reports Suggest that Agencies are Making Limited Use of Section 3610, but the DoE, DoD and NASA are the leaders.
