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January 19, 2017

False Statements and False Certifications — What Makes for a False Claims Act Violation?

Stan Martin

The federal government and most states have false claims acts, providing for civil or criminal penalties for any government contractor who pursues a “false claim.” Attorneys for government agencies, and attorneys for companies under contract with those government agencies, recognize the prevalence of false claims allegations in many government contractor disputes.

Government contracts, in addition to the normal routine of change orders and monthly requisitions, require various types of certifications by the contractor.  What types of errors or misstatements in these documents will rise to the level of a "false claim?" Is it the nature of the request, or the degree of the misstatement, or the intent? Or, some combination of the foregoing? A review of relatively recent cases in several jurisdictions provides some guidance in assessing when a misstatement will lead to proof of a "false claim." As used in this article, "FCA" refers to any false claims act, and the particular jurisdiction, when appropriate, is noted.

Early Case Law

First, a look at early case law under the Federal False Claims Act.  One of the early decisions held that the federal FCA encompasses more than requests for money that is not due. Rather, it extends "to all fraudulent attempts to cause the Government to pay out sums of money." For example, the federal FCA applied to false statements made in a contractor's loan application to a federal agency. This demonstrates one consistent theme throughout a number of jurisdictions, that false statements for the purpose of procuring a contract will be consider a violation of the pertinent FCA.

It is well-established that a contractor's monthly requisitions will each constitute a "claim" when there is a material misstatement or misrepresentation embedded within the requisition. If the contractor falsely certified that it was qualified under the Small Business Administration 8(a) program, as in Ab-Tech Constr. v. United States, then each requisition submitted under the ill-gotten contract constituted a "claim" based on a material misrepresentation. According to the court:

The payment vouchers represented an implied certification by Ab-Tech of its continuing adherence to the requirements for participation in the 8(a) program. Therefore, by deliberately withholding from SBA knowledge of the prohibited contract arrangement with Pyramid, Ab-Tech not only dishonored the terms of its agreement with that agency but, more importantly, caused the Government to pay out funds in the mistaken belief that it was furthering the aims of the 8(a) program. In short, the Government was duped by Ab-Tech's active concealment of a fact vital to the integrity of that program.

<\/sup>Recent Case Law

In June 2016, the U.S. Supreme Court in Universal Health Services, Inc. v. United States ex rel. Escobar focused on a materiality standard in assessing an FCA claim. Per the Supreme Court, the critical issue is "whether the defendant knowingly violated a requirement that the defendant knows is material to the Government's payment decision."

More recently, in a District of Columbia federal court decision, where the government alleged that certain persons attempted to obtain SBA 8(a) contracts for related companies through misrepresentations and false certifications, the court allowed motions to dismiss FCA claims against some of the defendants who were neither at the center of the alleged scheme, nor directly involved in the claimed false statements. In doing so, the court distinguished between false statements made by those at the center of the claimed scheme, from those persons and companies who may have been in a position to know of the false statements but did not take any action thereon. In that setting, the court was distinguishing between direct false claims and "reverse false claims," where a party improperly fails to transmit money to the government based on a knowing false record or statement. 

Similarly, under the Delaware FCA, a person filing for unemployment compensation while otherwise employed in a new job was "knowingly present[ing] . . . a fraudulent claim for payment, in violation of that FCA. And under the California FCA, a contractor who engaged in a practice of submitting excess requisitions from time to time provided the basis for a jury to decide that the contractor had violated that state's FCA on more than one occasion. From the decision, it is clear that the court believed the overstatement to be intentional, and almost in the nature of a game by the contractor to see how much it could seek without being challenged.

Knowledge of falsity of the certification is also a requirement of an FCA claim. So, when a contractor deducted fringe benefits from each worker's paycheck based on a certain formula believed to be appropriate (based on advice from an accountant), the payroll certifications even though falsely certifying compliance with Davis-Bacon requirements were not knowingly false, and no FCA claim was proven.

Where a relator alleged that certain work failed to comply with contract specifications, but no connection was demonstrated between the alleged noncompliance and requests for payment, the relator did not demonstrate a false certification in violation of the FCA, even assuming noncompliance.

Direct requests for payment to the government, such as via monthly contractor requisitions, and if knowingly false fall clearly within the bounds of an applicable FCA. But what about the more indirect statements and certifications? Decisions indicate certain tendencies, but as noted below, there are few clear lines for contractors and their counsel to rely upon in assessing liability for a FCA claim.

A seminal California appellate court decision, in the case of Fassberg Construction Co. v. Housing Auth. of City of Los Angeles, held that weekly payroll certifications and change order proposals were not "claims" under the California FCA. The court held that the California FCA, at that time, authorized penalties for "false claims," but not for a "false record or statement." Looking at the project contract and the sequence leading to any change order, the court held that a change order proposal had to be accepted by the public authority before a change order could be written, and only after the change order had been written could the contractor seek payment thereon. There was no "claim" in a proposed change order. And weekly payroll certifications, even if containing misstatements, were records and not "claims" for purposes of the California FCA.

Since the Fassberg decision, however, the California legislature amended that state's FCA. Under the amended law, the outcome may be different. In the case of County of L.A. v. Superior Gunite, a trial court supported the contractor's position that "change estimates" and "time extension requests" were not "claims" under the state FCA. But the appellate court noted the amendment of the FCA subsequent to Fassberg, whereby the FCA prohibited knowing use of "a false record or statement material to a false or fraudulent claim." In California, therefore, application of the FCA may well extend to change order proposals or other preliminary statements that will be used to support a more formal request for contract amendment and, eventually, payment for the same.

Where the wage certifications were false, under the federal FCA, the contractor was liable to the government for the discrepancy between wages paid and wages that should have been paid. But in that instance, the court also indicated its position that the amount of the violation was almost de minimus relative to the entire contract, perhaps even resulting from oversight or unintentional error. However, contrary to the Fassberg decision in the California courts, the federal court considered payroll certifications to constitute "claims" under the FCA.

In New York, a court was faced with allegations of false statements of compliance with a DBE program. The court pointedly held that potential violation of the DBE program was not the issue. Rather, false statements claiming compliance with the DBE program, made with knowledge of their falsity, could support a claim for violation of the state law. In fact, the contractor was not charged with violation of the DBE program, but with making false or fraudulent statements certifying compliance with the same.    

Certification of compliance with specified criteria may be an FCA violation if the certification was knowingly false when made, and was further made in support of requests for payment.  United States v. Kiewit Pac. Co. In that case a relator was given leave to file an amended complaint, based on an underlying claim that the contractor had falsely certified compliance with a specific retaining wall requirement while directing others to ignore the same. 

A recent New York trial court decision denied a motion to dismiss FCA claims arising from alleged improper certification of ownership of a company whose principals had been arrested and subsequently pled guilty to bribing public officials. The New York City Housing Authority will be able to proceed with FCA claims that it was fraudulently induced to enter into contracts, based on false certifications that the convicted persons had no further or continued involvement with the contracting companies. 

Where a contractor may have improperly substituted subcontractors in violation of a procurement law, this violation would not be considered to affect the contractor's requisitions. In that event, even assuming contravention of the state laws, there was neither a "false claim" nor a "false record or statement material to a false claim."

With prevailing wage requirements, courts have drawn a distinction between falsely certifying that workers were being paid properly, which would be an FCA violation, and improperly misclassifying workers among different trades, which could be a statutory violation but not amount to an FCA violation.

If the certification concerns a matter that is subject to interpretation or to varying standards, then it will not result in a violation of the FCA. Thus, where there were varying interpretations of the amount of experience required for engineering inspectors, an FCA claim predicated on the allegation that certain persons were improperly deemed to be qualified was not upheld.

One decision in Massachusetts, not strictly under the state FCA (although such a claim was presumably available to the public authority), is nonetheless apropos of this topic. In the case of G4S Technology, LLC v. Mass. Technology Park Corp., the public authority challenged the contractor's right to pursue a contract action, due to the contractor's false certifications on multiple requisitions. The false statements were that subcontractors had been paid all amounts due to them from prior requisitions; there was apparently ample evidence to the contrary, for what the court clearly considered to be an improper reason. Although the public authority did not pursue a FCA claim, the court held that the false statement was both material and went to the heart of a contract obligation. Due to the contractor's false payment certifications, the court barred the contractor's contract claims and quantum meruit claims, the latter on the grounds that false certifications meant the contractor had failed to substantially perform in good faith.

Requests for Payment and Statements Concerning Eligibility Consistently Considered FCA Claims

On balance, there is consistency among the courts in holding that direct requests for payment, and statements made directly affecting the contractor's eligibility for the contract in question, will all be considered "claims" under the applicable FCA. Proposals, estimates, or other preliminary contract documents may not be considered "claims" depending on the exact language of the pertinent FCA. And, perhaps depending as well on context. On this aspect a consistent line has not been drawn by various courts.

When it comes to other statutory requirements, the courts seem inclined to draw a distinction between actual compliance, versus statements or certifications made as to such compliance.  Failure to comply may not be considered a material violation, thus amounting to a "claim" under the FCA or a violation of the FCA. On the other hand, false or fraudulent statements or certifications, verifying or attesting to compliance when the person providing the statement or certification knows otherwise, will likely be considered a violation of the pertinent FCA. 

Finally, when it comes to other project documents that may be false or at least incorrect, the courts appear to rely more heavily on context to evaluate whether those false or incorrect statements or certifications rise to a level of materiality to become a breach of contract, or to support application of FCA sanctions.

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Stan Martin

Commonsense Construction Law LLC, Boston, MA