Introduction
Amendments to the False Claims Act were introduced by a bipartisan group of senators in late July as “The False Claims Amendments Act of 2021” (S.B. 2428). These Amendments could potentially change the False Claims Act - particularly as it pertains to materiality and how federal courts will apply that concept in the context of qui tam actions stemming from inaccurate subcontractor status reports.
The New Proposed Legislation
“The False Claims Amendments Act of 2021” (the “FCA Amendments”) was also introduced as the “Anti-Fraud Amendments Act,” (Amendment No. 2435) in an earlier version of the Infrastructure Investment and Jobs Act (“Infrastructure Act”) that was passed by the United States Senate. Amendment No. 2435, however, did not appear in the final Infrastructure Act that passed in the House. Because one of the sponsoring senators, Senator Chuck Grassley of Iowa, has previously been successful in shepherding amendments to the False Claims Act through Congress, the proposed FCA Amendments have a fair chance to pass.
The FCA Amendments do not propose changes to the definition of “material” as included in Section 3729(b)(4) of the False Claims Act. 31 U.S.C. § 3729(b)(4). Instead, they propose a burden-shifting scheme that would apply to the demonstration of materiality. Under the proposed FCA Amendments, the government or relator would still need to establish materiality by a preponderance of evidence, which mirrors the current standard. The defendant would then need to rebut that showing through clear and convincing evidence. Under the current statutory framework, defendants are not required to rebut a demonstration of materiality. A contractor’s reimbursement request implicitly represents compliance with all governing contracts and regulations. However, noncompliance is only actionable if it is material. Instead, as set forth in Universal Health Services, Inc. v. US ex rel. Escobar, whether a provision allegedly violated by a defendant is labeled a condition of payment is relevant, but not dispositive of, the materiality inquiry into whether the defendant has made an actionable false or fraudulent claim under the Act. 136 S. Ct. 1989, 2001 (2016).
The proposed new language in the FCA Amendments could significantly raise the bar for False Claims Act defendants to defeat materiality. Though not clear from the proposed text, the change may be intended to establish a presumption of materiality in those situations where the government has grounds to deny payment on a claim. When asserted, the defendant would have the burden to show—by clear and convincing evidence—that the alleged violation was not actually material to the government’s decision whether to pay the claim(s) at issue. One thing is clear - no matter how the courts interpret this new statutory language, False Claims Act defendants will have more difficultly challenging materiality in the future if the The False Claims Amendments Act of 2021 passes or is incorporated into other legislation.
Subcontractor Status Reports And Materiality
Under current law, whether inaccurate subcontractor status reports meet the materiality standard sufficient to give rise to liability under the False Claims Act is unclear. Standing alone, the status report is not a claim for payment; however, status reports potentially influence claims for payment made by the contractor to the government later in time. This is because those status reports may later be utilized by a relator in a qui tam action to show that invoices submitted for payment do not reflect the work performed. See United States ex rel. Keaveney v. SRA International, Inc., 219 F. Supp. 3d 129, 154 (D.D.C. 2016). As such, an argument could certainly be made that a given status report is material to a subsequent payment decision.
Post-Escobar caselaw has embraced an implied certification theory that reflects the materiality standards currently embodied in the False Claims Act. United States v. Triple Canopy, Inc., 857 F.3d 174, 178-79 (4th Cir. 2017) (“Triple Canopy”); United States ex rel. Campbell v. KIC Development, LLC, 2019 WL 6884485, Case No. EP-18-CV-193-KC, *7-*9 (W.D. Tex. Dec. 10, 2019) (slip op.). Under the implied certification theory, “the act of submitting a claim for reimbursement itself implies compliance” with contractual provisions, statutes, and regulations. U.S. ex rel. Wilkins v. United Health Group, Inc., 659 F.3d 295, 305 (3rd Cir. 2011); Escobar, 136 S. Ct. at 1995; Triple Canopy, Inc., 857 F.3d at 178-79. An affirmative declaration of compliance, therefore, is not required. Escobar permits the argument that whatever the defendants’ noncompliance is, it may be sufficiently material to the payment decision to qualify the request for payment as a false claim under the False Claims Act.
Escobar was decided in the context of a healthcare provider that hired staff members who violated state regulations for the particular type of care they were providing. The federal government in Escobar did not contract for that state-mandated standard of care. The paradigm on which Escobar was decided differs significantly from the construction industry. Parallels can be drawn, however, because often a construction project will also be governed by laws and regulations not delineated in the corresponding contract documents. Therefore, question could be asked whether a subcontractor status report amounts to a certification of compliance? Is the report an express condition for payment? Two courts that have addressed that issue to date finding that subcontractor status reports do not rise to the level of “material” in most circumstances.
A federal district court in North Carolina recently found that because small business certifications on inaccurate Individual Subcontracting Reports (“ISR”) (Standard Form 294), were not core or basic requirements contemplated for work provided under the contract, the certifications were not “material” as that concept has been applied by Escobar and its progeny. U.S. ex rel. Howard v. Caddell Construction Company, Inc., Case No. 7:11-CV-270-FL, 2021 WL 1206584 (E.D.N.C. Mar. 30, 2021). The Howard court offered three rationales for its findings. First, it stated that the parties’ subcontracting plan was not an express condition of payment and the consequence for a contractor that could not verify the accuracy of the ISR was merely the rejection of the report as a deliverable, not a stoppage of work or payments to the contractor. Second, the Howard court noted that the government continued to pay on the contract even after the relator filed the qui tam litigation and after criminal charges were filed against one of the defendants. The government also decided not to assess liquidated damages against that defendant based upon the defendant’s good faith efforts to comply with the subcontracting plan. Finally, the Howard court pointed out that the defendants did not know that the certification of compliance with the subcontracting plan was material to the government’s decision to make monthly payments, nor did any government agents tell the defendants otherwise. For those three main reasons, the court held that the subcontractor’s inaccurate ISRs did not give rise to a false claim under Escobar.
In another decision, the Ninth Circuit in United States ex rel. Kelly v. SERCO, Inc., relied upon Escobar to uphold summary judgment dismissing a False Claims Act claim against the contractor brought by a qui tam relator. 846 F.3d 325 (9th Cir. 2017). In Kelly, the relator employee alleged that a government contractor failed to comply with a national standard related to a cost and progress tracking tool required by the Federal Acquisition Regulation as part of the contractor's project management performance. Instead of filing the required reports, the contractor manually recorded employee hours, compiled these time entries into Excel spreadsheets, and submitted those to the government. The district court granted summary judgment in favor of the defendant contractor. On appeal, the relator argued that the district court wrongly analyzed the relator’s claim under the express false certification theory of liability. In its analysis of materiality, the Ninth Circuit quoted Escobar stating that “[p]ayment requests by a contractor who has violated minor contractual provisions that are merely ancillary to the parties' bargain are neither false nor fraudulent” demonstrating the limits of the implied certification theory post-Escobar.
In light of the pending legislative changes relating to how materiality can be demonstrated and rebutted in implied certification cases, it is important to note the distinction between status reports that certify compliance with a subcontracting plan and the inclusion of certifications of compliance in a document that qualifies as a request for payment. The former is less likely to be found in violation of the False Claims Act, while the latter will likely face the higher scrutiny contemplated in connection with the proposed changes to the False Claims Act.
The False Claims Act and the required compliance issues that can give rise to liability under the Act are complicated and sometimes difficult to understand. Contractors performing work for the federal government would do well to seek guidance on compliance issues outside of their sphere of expertise.