FEDERAL CONTRACT LAW

Supreme Court upholds whistleblowers' rights

Joseph J. Petrillo

For vendors, fraudulent government contracting carries three significant risks: criminal fraud prosecution, debarment and liability under the False Claims Act.

Debarment is visited on small businesses, but big businesses make juicier targets for false-claims actions. Larger contracts mean greater damages, and big corporations' deeper pockets mean that they have money enough to pay a large judgment.

Liability under the False Claims Act is triggered by knowingly presenting a false or fraudulent claim to the United States for payment. The standard for 'knowingly' is low and includes acting in deliberate ignorance or in reckless disregard of the truth. And any kind of demand for payment can suffice. As those in the health care industry have learned, Medicare reimbursement is a species of claim on the government.

The sanctions imposed by the act can be severe. In 1985, incensed by revelations of fraud in Defense Department contracting, Congress upped both the fines and the damages. The top penalty of $5,000 became the minimum, and the ceiling rose to $10,000 for each false claim. In addition, Congress increased the damages from twice to three times the amount of the loss sustained by the government.

The combination of multiple penalties with treble damages can add up to staggering liability. A major hospital company is proposing to settle a number of such suits for $750 million. The risk of damages is so great that some analysts cite it in their low stock valuation of defense contractors.

A controversial provision of the act deputizes people as whistleblowers to bring suit on behalf of the government and claim a portion of the damages and penalties as a reward. This type of suit is called 'qui tam,' a Latin phrase describing the relationship between the private plaintiff, or relator, and the government.

Thing of the past

If the punishment meted out by a qui tam suit seems medieval, that's because the origins of this type of lawsuit are medieval, dating back to 14th-century England.

A successful qui tam plaintiff stands to make lots of money. His or her share of the proceeds of the action ranges up to 25 percent if the government intervenes in the case, which it has the right to do. If the government declines to intervene, the relator's share grows to 30 percent. Either way, the winning plaintiff also gets reasonable expenses, including attorneys' fees and costs. Hence, a cottage industry has sprung up of plaintiff's lawyers willing to take such cases on a contingent fee basis.

Use of these qui tam suits has mushroomed in recent years, and so have efforts to repeal or limit them. Although Defense has supported these efforts, the Justice and Health and Human Services departments have not. Congress has been reluctant to blunt a weapon that has returned so much cash to the Treasury and no doubt had a deterrent effect on those who might cut corners.

So contractors turned to the Supreme Court. They hoped that an increasingly conservative Court would strike down as unconstitutional a statute that grants some of the government's powers to a private party.

A case presenting this question finally arrived at the Supreme Court this term: Vermont Agency of Natural Resources vs. United States and Stevens. It questioned whether a private party bringing a qui tam action would meet the constitutional test of standing. And, because the defendant was a state, the case would settle whether a state was liable for False Claims Act damages.

Justice Antonin Scalia issued the majority opinion of the court on May 22. He held that the private party did have standing. The qui tam suit was aimed at redressing a real injury suffered by the government, and the statute properly assigned a portion of the government's damages claim to the plaintiff.

The states fared better, however, and won a ruling that they weren't subject to the False Claims Act. Congress will have to be explicit in including them, if it wishes to do so in the future. Even then, it may run afoul of the 11th Amendment, which keeps the federal government out of suits by individuals in one state against another state.

Now that the Supreme Court has refused to slay the qui tam dragon, contractors will have to revisit their legislative options. Nothing short of an act of Congress will relieve them from the risk of substantial damages resulting from a suit by a whistleblower or the Justice Department itself.

Joseph J. Petrillo is an attorney with the Washington law firm of Petrillo & Powell. E-mail him at jp@petrillopowell.com.

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