February 27, 2020 Procurement Lawyer

Imputation of False Claims Act Liability to Prime Contractors

by Sandeep N. Nandivada & David R. Allman

Sandeep N. Nandivada is a government contracts associate in Morrison & Foerster’s Washington, D.C., office.

David Allman is a law clerk in the firm’s Government Contracts Practice and is not yet admitted to the bar.

The specter of the civil False Claims Act (FCA) is, by now, well known to companies doing business with the federal government. The FCA creates liability for any entity that “knowingly presents, or causes to be presented, a false or fraudulent claim for payment or approval,” or that “knowingly makes, uses, or causes to be made or used, a false record or statement material to a false or fraudulent claim.”1 In Fiscal Year 2018, the U.S. Department of Justice recovered over $2.8 billion in FCA matters, including over $107 million from the defense industry.2

Less understood are the myriad ways in which a company can find itself on the wrong side of an FCA action. Government contractors frequently focus their attention inwardly, thinking they can improve their own internal ethics and compliance systems to ward off potential FCA suits. But FCA threats are not so limited in nature. A company can find itself in hot water based not just on its own conduct, but also on the conduct of its employees, agents, or subcontractors.

This article discusses how subcontractor misconduct can give rise to FCA liability for prime contractors who have not committed any wrongdoing directly. The Supreme Court of the United States has explicitly held that, although a subcontractor does not have privity of contract with the government, it still may be subject to FCA liability by causing a prime contractor to submit a false claim to the government on the subcontractor’s behalf.3 But what of the prime contractor’s liability when one of its subcontractors has committed an FCA violation? Under what circumstances can a prime be held liable for its subcontractor’s misconduct?

The answers to these questions are not always clear. Frequently, prime contractor liability for subcontractor misconduct depends on whether the prime contractor exercised reasonable care in its efforts to manage the subcontractors’ contract performance. This necessarily is a fact-intensive inquiry that does not lend itself to bright- line rules. As discussed below, however, several best practices can help prime contractors mitigate the risk of FCA liability for subcontractor violations.

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