False Claims Act misuse undermines its power

The False Claims Act (FCA) is an important weapon in the government arsenal against
fraud, but, like any weapon, it is equally subject to abuse when used in the wrong
situation.


FCA permits triple actual damages and additional damages of $10,000 per invoice that
constitutes the false claims.


How does it work? Assume for the moment a vendor in a General Services Administration
Multiple-Award Schedule contract negotiation negligently fails to disclose some piece of
sales data showing that an additional discount is provided to certain types of customers.
The government may then claim that every single MAS invoice submitted is a false claim
under Title 31 of the FCA.


The first element the government must prove is that there has even been a false claim.
The second is that the vendor made the claim "knowingly."


Knowingly in this context does not mean that the government has to prove that the
vendor's negotiators crossed their fingers under the table as they deliberately submitted
the bad data. It can be less easy to prove, and the degree of proof can be the subject of
litigation.


It gets even more complex in those instances where the Truth in Negotiations Act (TINA)
applies to the cost accounting data the government routinely requests. In a TINA case, the
government must prove the following elements:


FCA cases typically come about as the result of a multiyear investigation. Such
investigations typically occur in one of three ways.


Some start as criminal cases but the government finds the vendor lacks the necessary
criminal intent so they are shifted to civil FCA status. Other cases are initiated as the
result of allegations by disgruntled former employees. Still others are simply the result
of extensive government auditing.


When the government chooses its cases well, the FCA is an appropriate and tough remedy.


But there are signs it is getting out of hand, that feds are resorting to use of the
FCA because they might think they have a better chance at extracting cash by winning the
case or by forcing a settlement.


But that strategy is risky. In recent years, the government has brought a series of FCA
cases that have led judges or juries to recoil. At least two dozen cases have resulted in
dismissals by the presiding judge or in findings of no liability by the jury.


The government appears to be using the power of the FCA in what are really contract
disputes that are more properly the subject of the Contract Disputes Act. But no amount of
huffing or puffing could prove the contractors' actions amounted to knowingly making false
or fraudulent claims--at least not in these cases.


In the MAS context, the most significant of these decisions is what's known as the Data
Translation case, a First Circuit decision written by then judge, and now Supreme Court
justice, Stephen M. Breyer. Breyer and his panel found that the record in the lower court
trial proved that the government's request for cost and pricing information under the MAS
program is so sweeping and so unattainable that no company can meet its requirements and
survive years of government scrutiny.


But the defendant in that case had to withstand an expensive and time-consuming trial
to get a favorable decision. For a vendor, it is a difficult decision to fight the
government rather than to pay money in an FCA-driven settlement.


Giving in


The effort of defending against a government investigation imposes levels of accountant
and attorney billable time that balloon so quickly that settlement is the only way to get
the issue under control.


The cost of making a full-scale defense presentation to stave off FCA prosecution can
cost hundreds of thousands of dollars in a complex case.


It is also difficult for a vendor to fight with its government customer on the one hand
and attempt to sell to it on the other.


In the long run, improper or overreaching government reliance upon the FCA threatens to
undermine its legitimate potency. In this new era of more agency discretion in
contracting, agencies need to more carefully identify the cases that really deserve to be
brought under the FCA.


Stephen M. Ryan is a partner in the Washington law firm of Brand, Lowell & Ryan. He
has long experience in federal information technology issues. E-mail him at smr@blrlaw.com.


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