Since the mid-1980s, there has been a meteoric rise in the number and size of federal grants awarded to state and local governments. Coincidentally, a parallel rise has also occurred since the mid-1980s in federal False Claims Act (FCA) lawsuits brought against state and local government recipients and subrecipients of federal grants. Applying principles of statutory interpretation, this article examines the ordinary and plain meaning of the FCA to show that Congress never intended for state and local government recipients and subrecipients of federal grants to be “persons” subject to its liability provisions. Moreover, this article reviews the statutory context and legislative history of the FCA’s definitions of “claims” from the 1986 and 2009 amendments to show that Congress intended to prevent fraud against and upon recipients (e.g., state governments) and subrecipients (e.g., local governments) of federal grants, not fraud committed by state and local government recipients and subrecipients of federal grants.
Erroneous interpretations of two U.S. Supreme Court decisions that held that state and local government recipients and subrecipients of federal grants are “persons” subject to FCA liability have led to absurd results. Thus, this article proposes legislative reforms to correct those two Supreme Court decisions by codifying congressional intent that state and local government recipients and subrecipients of federal grants are not “persons” subject to the FCA’s liability provisions, and that the definitions of “claims” from the 1986 and 2009 FCA amendments do not include those presented by state and local government recipients and subrecipients of federal grants.
“Amuck” means “out of control.” Out of control could best describe the meteoric rise in federal grants-in-aid (i.e., grants) to state and local governments since the mid to late 1980s. Likewise, “out of control” could describe the meteoric rise since the mid-late 1980s of federal civil False Claims Act (FCA) cases brought against state and local government recipients and subrecipients of federal grants.
Since the mid-1980s, the federal government has increasingly awarded grants to state and local governments to further national public policy objectives in support of public education, public health, community and economic development, cybersecurity, emergency preparedness and disaster response, environmental protection, job training, medical and scientific research, social services, public safety, and public works infrastructure projects.
On a parallel track, since 1986, private citizens (i.e., qui tam plaintiff relators) and the U.S. Department of Justice (DoJ) have brought numerous FCA lawsuits against state and local government recipients and subrecipients of federal grants (e.g., state agencies/departments, institutions of higher education (IHEs), city and county school districts, city and county hospitals, city and county housing authorities, city and county public works infrastructure authorities [e.g., housing, transportation, water, etc.]).
While much scholarly attention has focused on the FCA and, primarily, its application to alleged fraud by contractors, very little scholarly attention has focused on the FCA’s application, let alone its “mis”-application, to alleged fraud by state and local government recipients and subrecipients of federal grants.
Likewise, while some commentary and scholarship on federal grants to state and local governments exists, little, if any, scholarship has focused on whether state and local governments are “persons” subject to the FCA’s liability provisions and/or whether Congress ever even intended for the FCA’s liability provisions to apply to claims presented by state and local government recipients and subrecipients of federal grants.
Thus, this article seeks to clarify the apparent confusion surrounding the misapplication of the FCA’s civil liability provisions to claims presented by state and local government recipients and subrecipients of federal grants. The central issues of this article are the following: 1) whether state and local government recipients and subrecipients of federal grants are “persons” subject to the FCA’s liability provisions; and 2) whether the statutory context of the definitions of “claim” from the 1986 and 2009 FCA Amendments refers either to fraud against and upon recipients (e.g., state governments) and subrecipients (e.g., local governments) of federal grants or to fraud by such recipients and subrecipients.
Part II of this article provides an overview of federal grants to state and local governments, as well as an overview of the federal FCA. Part III addresses two erroneous interpretations by the Supreme Court as to whether state and local government recipients and subrecipients of federal grants are “persons” subject to FCA liability. Applying the principles of statutory interpretation, Part IV analyzes the 1) ordinary and plain meaning of “persons” subject to FCA liability; 2) statutory context of the definitions of “claims” from the 1986 and the 2009 FCA Amendments presented to recipients and subrecipients of federal grants; 3) legislative history and intent of “persons” and “claims” under the 1986 and 2009 FCA Amendments; and 4) absurd results caused by arguably two erroneous Supreme Court interpretations of “persons” and “claims.”
Part V identifies prudential considerations for not subjecting state and local government recipients and subrecipients of federal grants to FCA liability. This part of the article discusses the facts that 1) the overwhelming majority of federal grant-related FCA violations are committed by private, for-profit recipients and subrecipients, not by public state and local government recipients and subrecipients; 2) far less draconian remedies are available to help protect the federal fisc (e.g., administrative sanctions, remedial—not punitive—civil penalties); and 3) the differing state court interpretations of “persons” subject to FCA liability under comparable, if not identical, state FCA liability provisions. Lastly, Part VI provides recommendations for reforms to legislatively clarify and correct the law as interpreted by two erroneous Supreme Court decisions that arguably misinterpreted “persons” subject to the 1986 and 2009 FCA Amendments liability provisions to include state and local governments.
Most federal grants are awarded directly to a state government recipient (i.e., agency or department), which often, in turn, subawards grants to local government subrecipients (i.e., city and/or county hospitals, city and/or county schools, city and/or county housing, transportation, and/or water authorities, etc.). In fiscal year (FY) 1980, the federal government awarded $91.4 billion in grants through 541 grant programs. By FY 2018, the federal government awarded $696.54 billion in grants through 2,323 programs. Between fiscal years 2001 and 2022, the federal government spent more on grants than it spent on procurements. For FY 2025, the federal government expects to award $1.1 trillion in grants to state, local, tribal, and territorial governments, the equivalent of 3.7% of gross domestic product.
Such increases in federal grants have led to a simultaneous growth of grant management compliance challenges for state and local government recipients and subrecipients due to the following:
1) “lack of appropriate performance measures and accurate data”;
2) “uncoordinated grant program creation”;
3) “need for better collaboration”;
4) “internal control weaknesses in grant management and oversight”; and
5) “lack of agency or recipient capacity” (relating to organizational, financial, and/or human resources available to implement grant programs).
These grant management compliance challenges have also simultaneously led to an increasing number of FCA actions brought by private citizen plaintiffs (i.e., qui tam relators) and DoJ against state and local government recipients and subrecipients of federal grants.
In 1863, Congress, at President Abraham Lincoln’s urging, enacted the FCA to combat Civil War fraud by defense contractors. Since then, the Supreme Court has held that Congress enacted the FCA to “protect the funds and property of the Government from fraudulent claims, regardless of the particular form, or function, of the governmental instrumentality upon which such claims were made.” Amended several times, the FCA has become the primary tool used by the DoJ to combat fraud against the federal government. A broad statute, courts have found that the FCA extends “to all fraudulent attempts to cause the Government to pay out sums of money.”
Known as “Lincoln’s Law,” the original FCA of 1863 provided for civil and criminal penalties, including civil penalties of $2,000 for each false claim submitted, double damages to the United States, fines of not less than $1,000 and not more than $5,000, and imprisonment of not less than one and no more than five years. Many also refer to the original FCA of 1863 as the “Informers Act” because its lead sponsor, U.S. Senator Jacob M. Howard of Michigan, included a qui tam provision in the legislation that allowed private citizens (i.e., relators) to sue on behalf of the federal government and, if successful, receive a reward equal to fifty percent of the federal government’s recovery.
The original FCA of 1863 explicitly and repeatedly defined “persons” subject to FCA liability as those in the military or naval forces who made, caused to be made, or presented or caused to be presented, claims upon or against the federal government, “knowing such claim to be false, fictitious, or fraudulent.”
After its enactment, courts viewed the original FCA of 1863 as a remedial statute “intended to protect the Treasury against the hungry and unscrupulous host that encompasses it on every side, and should be construed accordingly.” However, during the World War II era, U.S. Attorney General Francis Biddle primarily used the criminal, rather than the civil, liability provisions of the FCA, to combat fraud. Consequently, civil attorneys would wait until DoJ filed criminal cases and then immediately file civil suits under the FCA, a practice many described as “parasitic.”
In response to parasitic FCA lawsuits, U.S. Attorney General Biddle sought outright repeal of the FCA’s qui tam provisions. Instead, Congress amended the FCA by inserting a public disclosure bar that precluded qui tam suits based solely on information the federal government already had in its possession, even though the federal government may have had the information for a long time but took no action on it, and even if the relator was the original source of the federal government’s information. Consequently, the next forty years saw DoJ recover far less from FCA civil actions.
Following the 1943 FCA Amendments, the federal government increased its defense spending and its domestic spending on healthcare programs, particularly Medicare. Predictably, reports of widespread fraud, waste, and abuse, primarily by defense contractors, not by state and local government recipients and subrecipients of federal grants, forced Congress to strengthen the FCA.
With the 1986 FCA Amendments, Congress provided additional qui tam incentives since DoJ and law enforcement did not appear able, at least by themselves, to combat fraud in federal programs. Additionally, the 1986 FCA Amendments made several other changes to the FCA.
Although the 1986 FCA Amendments did not define “person” for purposes of liability, Congress did create a new § 3729(a), which stated in relevant part:
“Liability for Certain Acts. —Any person who . . . (7) knowingly makes, uses, or causes to be made or used, a false record or statement to conceal, avoid, or decrease an obligation to pay or transmit money or property to the Government, is liable to the United States Government for a civil penalty of not less than $5,000 and not more than $10,000, plus 3 times the amount of damages which the Government sustains because of the act of that person, except that if the court finds that—
(A) the person committing the violation of this subsection furnished officials of the United States responsible for investigating false claims violations with all information known to such person about the violation within 30 days after the date on which the defendant first obtained the information;
(B) such person fully cooperated with any Government investigation of such violation; and
(C) at the time such person furnished the United States with the information about the violation, no criminal prosecution, civil action, or administrative action had commenced under this title with respect to such violation and the person did not have actual knowledge of the existence of an investigation into such violation; the court may assess not less than 2 times the amount of damages which the Government sustains because of the act of the person. A person violating this subsection shall also be liable to the United States Government for the costs of a civil action brought to recover any such penalty or damages.”
Further, the 1986 FCA Amendments addressed fraud perpetrated upon grantees (e.g., state government recipients of federal grants) by defining “claim” as
any request or demand, whether under a contract or otherwise, for money or property which is made to a contractor, grantee, or other recipient if the United States government provides any portion of the money or property which is requested or demanded, or if the government will reimburse such contractor, grantee, or other recipient for any portion of the money or property which is requested or demanded.
In doing so, the 1986 FCA Amendments legislatively reversed two court decisions, United States ex rel. Salzman v. Salant & Salant, Inc. (Salzman) and United States v. Azzarelli Construction Co. (Azzarelli). In Salzman, the federal district court for the Southern District of New York had dismissed a complaint that alleged that the defendant submitted a false claim for payment to the Red Cross, a non-profit organization recipient of federal grant funds. The district court held that although the Red Cross received federal grant funds, it was not part of the government and, therefore, the FCA did not apply to any false claims presented to it for payment.
In Azzarelli, the Seventh Circuit had held that, despite defendant contractors bid-rigging conspiracy on a state highway construction project, they did not present a claim upon or against the federal government. In Azzarelli, the United States and the state of Illinois had entered into a cooperative agreement for the financing and construction of public highways in Illinois under the Federal Aid Highway Act. The federal government provided seventy percent of the funds for the highway projects, and the state of Illinois sought competitive bids for their construction. Since the contractors presented their claims to the state of Illinois and not to the federal government, the Seventh Circuit held that the claims were outside of the reach of the FCA, considering all the harm to have impacted the state and not the federal government.
As explained in Senate Report 99-345, which accompanied S. 1562, the False Claims Reform Act (i.e., 1986 FCA Amendments), Congress intended the new definition of “claim” in the new subsection (d) of § 3729 to “overrule Azzarelli and similar cases which have limited the ability of the United States to use the act to reach fraud perpetrated on federal grantees, contractors or other recipients of federal funds.”
In addition to Senate Report 99-345, other congressional reports show that Congress intended for the definition of “claim” to include only claims presented to state and local government recipients and subrecipients of federal grants, not claims presented by state and local government recipients and subrecipients of federal grants.
Notably, several states and some local governments have enacted their own civil false claims statutes and ordinances, which closely mirror the language of the FCA. Some state courts have found that under their respective state FCAs, “persons” do not include state or local government recipients of grant funds.
In the wake of the 2008 housing crisis and economic recession, Congress passed the Fraud Enforcement Recovery Act of 2009 (FERA), principally to improve enforcement of mortgage fraud, securities and commodities fraud, financial institutions fraud, and other fraud related to federal assistance and other relief programs. In FERA, Congress made several changes to the FCA, some of which were to “clarify and correct erroneous court decisions,” pertaining to the presentment of claims by contractors to sub-grantee recipients. Of relevance to this article, Congress intended these changes to remedy two court decisions involving sub-contractor and sub-grantee “presentment” issues: United States ex rel. Totten v. Bombardier Corp. (Totten) and Allison Engine Co., Inc. v. United States ex rel. Sanders et al. (Allison Engine).
Specifically, Senate Report Number 111-10 “Sec. 4 . . . (A), Fraud against government contractors and grantees,” explains Congress’s intent to clarify and correct erroneous interpretations of the law that were decided in Totten and in Allison Engine. In Totten, a contractor allegedly presented false claims to the grant recipient, Amtrak, to obtain payment for its allegedly defective railroad cars. The D.C. Circuit had held that a false claim presented by a contractor, not to the federal government but to a grantee, is not presented to the federal government and, therefore, is not actionable under the FCA merely because the payment comes from funds that the grantee received from the federal government.
In Allison Engine, relators brought a qui tam action against subcontractors, alleging fraud in the negotiation and execution of subcontracts for components of electrical systems in Navy destroyers. The Supreme Court had held that a plaintiff had to prove that the defendant intended to defraud the federal government when makings its claim (i.e., it mattered whether the defendant “presented a claim” to the federal government or not.) The Supreme Court reasoned that the FCA requires that a defendant intend for the federal government itself to pay the claim, rather than just show that a false statement resulted in the use of federal government funds to pay a false or fraudulent claim. To correct Allison Engine, Congress eliminated the FCA “intent” requirement in section 3729(a)(2) and (a)(3); and, to also correct Totten, updated the definition of “claim” to the following:
(A) Any request or demand, whether under a contract or otherwise, for money or property and whether or not the United States has title to the money or property, that—
(i) is presented to an officer, employee, or agent of the United States; or
(ii) is made to a contractor, grantee, or other recipient, if the money or property is to be spent or used on the Government’s behalf or to advance a Government program or interest, and if the United States Government—
(I) provides or has provided any portion of the money or property requested or demanded; or
(II) will reimburse such contractor, grantee, or other recipient for any portion of the money or property which is requested or demanded.
In 2010, Congress included several FCA Amendments in the Patient Protection and Affordable Care Act (ACA) and in the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank). However, none of the 2010 FCA Amendments changed the 1986 or 2009 FCA Amendments’ definitions of “person” or “claim.”
III. Erroneous Interpretations of State and Local Government Recipients and Subrecipients of Federal Grants as “Persons” Subject to the FCA’s Liability Provisions
Following the 1986 FCA Amendments, state and local government recipients and subrecipients of federal grants became the target de jour of qui tam relators and DoJ. To make matters worse, the Supreme Court issued two decisions that have led to absurd results of lower courts, DoJ, and the qui tam relators bar presumptively interpreting the FCA’s liability provisions to include state and local governments recipients and subrecipients of federal grants.
A. Vermont Agency of Natural Resources v. United States ex rel. Stevens
In Vermont Agency of Natural Resources v. United States ex rel. Stevens (Vermont Agency of Natural Resources), the Supreme Court held that qui tam relators cannot bring FCA actions against a state or state agency, as states are not “persons” under § 3729(a)’s liability provisions. While mostly correct, the decision left open, unnecessarily, the question of whether DoJ can bring actions against a state or state agencies under the same FCA liability provisions.
In Vermont Agency of Natural Resources, the relator alleged that the state agency on natural resources submitted false claims to the U.S. Environmental Protection Agency in connection with federal grant funds it received. Writing for the majority in a 7–2 decision, Justice Scalia noted the FCA’s historical context in which the principal goal of the original FCA of 1863 was “stopping the massive fraud perpetrated by large [private] contractors during the Civil War.” He further noted that the FCA’s liability provision—“the precursor to today’s § 3729(a)—bore no indication that states were subject to its penalties.” Justice Scalia also offered additional rationales for the Supreme Court’s decision.
Justice Scalia also noted that the current version of the FCA (i.e., 1986 FCA Amendments) imposes treble damages that are “essentially punitive in nature,” which he added would be “inconsistent with state qui tam liability in light of the presumption against imposition of punitive damages on governmental entities.” Justice Scalia further noted that “the very idea of treble damages reveals an intent to punish past, and to deter future, unlawful conduct, not to ameliorate the liability of wrongdoers.”
In her concurring opinion, Justice Ginsburg, with whom Justice Stephen Breyer joined, applied the “clear statement rule” and did not find in the FCA “any clear statement subjecting the states to qui tam suits brought by private parties.” However, in dicta, Justice Ginsburg noted that although the clear statement rule has been applied to private suits against a state, it has not been applied “when the United States is the plaintiff.” Thus, she interpreted the Supreme Court’s majority decision to “leave open the question whether the word ‘person’ encompasses States when the United States itself sues under the False Claims Act.”
Consequently, Vermont Agency of Natural Resources has not prevented DoJ, on its own, from bringing FCA actions against states or state entities. In the wake of this decision, what is a “state entity” also appears to be an open question. Some lower courts have held, to avoid qui tam liability, that an entity is only a state entity if it is considered an “arm of the state” by its state legislature.
After Vermont Agency of Natural Resources, two federal circuit courts of appeal determined that local governments were not subject to FCA liability. However, in Cook County, Ill. v. United States ex rel. Chandler (Cook County), the Supreme Court recognized that, although § 3729(a) of the FCA does not define “person,” municipal corporations were considered persons when the FCA was enacted in 1863 and, thus, are subject to its punitive civil liability provisions.
In Cook County, the relator was a former research project director who brought a qui tam action against a county-operated hospital. The relator alleged that the hospital fraudulently obtained federal grants from the National Institute of Drug Abuse for a research project on the treatment of drug-dependent pregnant women.
Writing for the Court in an unanimous opinion, Justice Souter noted: “While §3729 does not define the term ‘person,’ its meaning has remained unchanged since the original FCA was passed in 1863.” He went on to note that “the term then extended to corporations” and that the Supreme Court, as early as 1826, “recognized the presumption that . . . ‘person’ ‘extends as well to persons politic and incorporate.’” Thus, the Supreme Court presumed that Cook County, Illinois, was a “person” under the original FCA, and, therefore, liable to qui tam relators. The Supreme Court rejected the presumption against subjecting local governments to punitive damages.
The Supreme Court also distinguished the basis for its presumption in Vermont Agency of Natural Resources that states are not subject to the same punitive civil liability provisions in the FCA from its presumption that local governments are subject to those same punitive civil liability provisions. Interestingly, using a similar approach to presuming a particular intent through a combination of silence in the statute and historical conventions regarding whether certain types of entities were considered “persons” when the FCA was enacted, the Supreme Court reached the opposite result for local governments as it did for arms of the state, presuming inclusion from legislative silence in 1863, 1943, and 1986.
Despite silence in the FCA and considerable ambiguity regarding coverage of local governments, the Supreme Court read in such coverage through historical context and treatment of local governments in other statutes, then seemed to suggest that consistency in the law for a century was support for holding in a particular way. Justice Souter reasoned that “the term ‘person’ in 3729 included local governments in 1863 and nothing in the 1986 amendments redefined it.” Justice Souter further added that “the County’s argument . . . [is] not merely that the treble damages feature of the 1986 amendments must be read to eliminate the FCA’s coverage of municipal corporations entirely, after being the statutory law for over a century.” Moreover, Justice Souter added that “it is simply not plausible that Congress intended to repeal municipal liability sub silentio by the very act it passed to strengthen the Government’s hand in fighting false claims.”
This presumption by the Supreme Court ignored the age-old legal maxim that the capacity to sue or be sued should be expressed in legislation. Moreover, ample evidence in the legislative history of the 1986 FCA Amendments suggests that congressional intent was not to endorse municipal liability.
In holding as it did, the Supreme Court appears to have adopted the doctrine of in pari materia, the substantive canon of statutory construction that presumes that “[s]tatutes addressing the same subject matter generally should be read ‘as if they were one law.’” Yet, the case which the Supreme Court relied on for its basis that “persons” included local governments at the time when the original 1863 FCA was enacted, did not involve a statute that addressed the same subject matter.
As a result of Cook County, courts, qui tam relators, and the DoJ have considered local governments as “persons” subject to FCA liability. This view flies in the face of congressional intent of the 1986 and 2009 FCA amendments as shown by those statutes context and legislative history.
Since neither the 1986 nor the 2009 FCA Amendments expressly define a “person” subject to its liability provisions, courts are left to interpret its liability provisions presumptively. Consequently, the ambiguity and vagueness of who is a “person” subject to the FCA’s liability provisions have left jurists, legal scholars, and practitioners to the rules of statutory interpretation for jurisprudential discernment. In applying rules of statutory interpretation, courts examine a host of principles, including but not limited to the 1) ordinary and plain meaning of the statute’s words; 2) statutory context of the legislative language; 3) legislative history and intent of the statute; and 4) interpretations that avoid absurd results.
The ordinary meaning canon of statutory construction presumes that “words should be given ‘their ordinary, everyday meanings,’ unless ‘Congress has provided a specific definition’ or ‘the context indicates that they bear a technical sense.’” To determine a word’s ordinary meaning, the Supreme Court has permitted reference to a dictionary.
Merriam-Webster’s defines “person” as “1. Human, Individual—sometimes used in combination especially by those who prefer to avoid man in compounds applicable to both sexes: one (as a human being, a partnership, or a corporation) that is recognized by law as the subject of rights and duties.” Likewise, Black’s Law Dictionary defines “person” as “1. A human being—Also termed natural person.”
Notwithstanding dictionary ordinary and plain meanings, even the long-established doctrine of “corporate personhood” distinguishes between a “private corporation” as a “private person” and a “municipal corporation” as a “public person.” Black’s defines “municipal corporation” as
A city, town, or other local political entity formed by charter from the state and having the autonomous authority to administer local affairs; esp., a public corporation created for political purposes and endowed with political powers to be exercised for the public good in the administration of local civil government.—Also termed municipality; statutory corporation. Cf. quasi-corporation under CORPORATION.
Moreover, municipal corporations are created for public benefit, not private benefit. As such, municipal corporations possess certain public powers (e.g., power of eminent domain; legislative powers to enact city or county ordinances and taxes; police and public safety [i.e., emergency and fire response] powers and regulations; public sewers and street maintenance; public buildings and public parks; municipal courts; and municipal elections) that private corporations do not and cannot possess. As noted by one scholar in the field of municipal corporations law, “[n]either of these powers can emanate from any source except the sovereign” (i.e., federal government or the state). Although the Supreme Court in Cook County cited treatises on the law of municipal corporations, it failed to make any distinctions between these definitional public purpose, or public powers.
The outcome of a statutory dispute can depend on the meaning of only a few words; thus, courts often interpret those words in light of the full statutory context. Thus, under the doctrine of “reddendo singula singulis, … words are applied to the subject matter to which they appear by the context most properly to relate, and to which they are really most applicable.”
As set forth in Part II above, the 1986 FCA Amendments substantially revised the previous original 1863 and the 1943 FCA Amendments definition of “persons” subject to liability. Moreover, the 1986 FCA Amendments liability provisions make no distinction between potential plaintiffs (i.e., qui tam relator and/or the federal government/DoJ). Consequently, the notion that a qui tam relator is barred from bringing a punitive FCA action against a state governmental entity, but that DoJ can, is not supported by the 1986 FCA’s statutory context. In this regard, the Supreme Court’s “open question” dicta in Vermont Agency of Natural Resources concurring opinion on whether DoJ can bring an FCA action against a state or state agency is inconsistent with the statutory context of § 3729(a).
The statutory context of “to . . . grantees” in the 1986 FCA definition of “claim” pertains to fraudulent claims for payment presented by contractors and others to grantees (e.g., state and local government grant recipients). The historical context of the amendments shows that among other things, Congress intended to address fraud perpetrated on grantees, “including states and other recipients of federals funds,” not fraud perpetrated by grantees.
As discussed above, through the 1986 FCA Amendments, Congress legislatively reversed two cases where federal grant recipients were the victims of fraud, not the perpetrators of fraud. The cases involved fraudulent claims presented by a contractor to a non-profit recipient and to government recipients of federal funds. Thus, the statutory context of the 1986 FCA Amendments shows that Congress intended to remedy fraud perpetrated on grantees, not fraud by grantees.
Similar to the 1986 FCA Amendments, the statutory context of “to . . . subgrantees” in the 2009 FCA definition of “claim” pertains to fraudulent claims for payment presented by contractors to subgrantees. As also discussed above, the statutory context of the 2009 FCA Amendments shows that Congress intended to address fraud perpetrated against (i.e., upon) subgrantees, not fraud by subgrantees. As stated earlier, through the 2009 FCA Amendments, Congress legislatively reversed two cases where the subgrantee recipients of federal grants were the “victims” of fraud by contractors, not the perpetrators of fraud. Thus, again, the historical statutory context of the 2009 FCA Amendments shows that Congress intended to remedy fraud perpetrated against subgrantees and not fraud perpetrated by subgrantees.
Legislative history also serves as one of the best extrinsic aids available to determine the legislature’s intent and purpose. In the hierarchy of legislative history, committee reports are considered a “particularly reliable source” and indicator of a statute’s meaning.
Review of the legislative history of the 1986 and 2009 FCA amendments shows congressional intent not to consider state and local governments as a “person” subject to liability. Further, the legislative history also shows Congressional intent in adding “to grantees” language to the 1986 FCA Amendments and the 2009 FCA Amendments definitions of “claim” to prevent fraud against, on, and upon state and local government recipients and subrecipients of federal grants, not fraud by them. The following reports clearly illustrate Congressional intent of the 1986 and 2009 FCA Amendments.
As previously discussed, the pre-1986 FCA language did not address claims for payment made to federal grant recipients, as was illustrated by Salzman. In Salzman, a federal district court held that a request or demand to a grant recipient from a contractor was not actionable under the FCA merely because a grant recipient received part of its money from the federal government.
To remedy this issue, Senator Dennis DeConcini (D-AZ) introduced S. 1981, the False Claims Act of 1979. Over the next six years, Congress held hearings and considered legislation to amend the FCA to address “modern fraud against the government.” Although none of the congressional hearing’s testimony addressed alleged fraud by state and local government recipients and subrecipients of federal grants, Senate Report No. 96-615, the Senate report summarizing S. 1980, has likely created confusion on this issue. Senate Report No. 96-615 states in relevant part:
The False Claims Act reaches all parties who may submit false claims. The term “person” is used in its broad sense to include partnerships, associations, and corporations [United States v. Hanger One, Inc., 563 F. 2d 1155, 1158 (5th Cir. 1977); United States v. National Wholesalers, Inc., 236 F. 2d 944 (9th Cir. 1956)], as well as states and political subdivisions thereof. Cf. Ohio v. Helvering, 292 U.S. 360, 370 (1934); Georgia v. Evans, 316 U.S. 153, 161 (1942); Monell v. Department of Social Services of the City of New York, 436 U.S. 658 (1978).
The Supreme Court cited this language from Senate Report No. 96-615 as a basis, in part, for its decisions in both Vermont Agency of Natural Resources and Cook County. However, neither of the three cases cited in Senate Report No. 96-615 regarding “states and political subdivisions thereof” involved statutes that were even remotely similar to the subject matter of the FCA.
Senate Report No. 96-615 also noted:
A claim upon any government agency or instrumentality, quasi-governmental corporation, or nonappropriated fund activity is a claim upon the United States under the Act. In addition, a false claim is actionable although the claim or false statements were made to a party other than the government, if the payment thereon would ultimately result in a loss to the United States. United States v. Bornstein, supra; United States v. Lagerbusch, 361 F.2d 449 (3rd Cir. 1966); Murray & Sorenson, Inc. v. United States, 207 F.2d 119, 123 (1st Cir. 1953). For example, a false claim to the recipient of a grant from the United States or to a state under a program financed in part by the United States, is a false claim to the United States. See, e.g., United States ex rel. Marcus v. Hess, 317 U.S. 537 (1943); United States ex rel. Davis v. Long’s Drugs, 411 F. Supp. 1144, 1149 (S.D. Cal. 1976).
In 1985, Congress considered several bipartisan, bicameral legislative proposals to amend the FCA. During congressional hearings held February 5 and 6, 1986, in the U.S. House of Representatives, a colloquy took place between Representative Thomas N. Kindness (R-OH), a member of the House Judiciary Subcommittee, and hearing witnesses, Representatives Berkley Bedell (D-IA) and Andy Ireland (R-FL), the latter of whom was the lead sponsor of two FCA Amendment bills.
During the colloquy, Representative Bedell testified, with Representative Ireland’s concurrence, that “I do not think that we want to get into a situation where local governments are being sued as they try and do their job, as best they can . . . .” As such, Representatives Bedell and Ireland both expressed their intent not to subject local governments to FCA liability. During his questioning of witnesses, Rep. Kindness provided an example also expressing his concern over subjecting local governments to FCA liability. Thus, the hearings comments and testimony by Representatives Bedell, Ireland, and Kindness strongly suggest that Congress did not intend for the 1986 FCA Amendments to subject local governments to FCA liability.
House Report 99-660 cited a 1981 comprehensive three-volume study by a GAO Fraud Prevention Task Force of fraud in government programs that found that most fraud goes undetected and then attempted to categorize what proportions of fraud arose from various sources. The GAO Task Force noticeably did not assert widespread fraud by state and local government recipients and subrecipients of federal grants.
Another long-standing principle of statutory construction is that an interpretation of a law that is consistent with its purpose is preferred over a reading of the law that frustrates its purpose. As stated above, the FCA is intended to reach “mischief.” However, as the FCA’s legislative history shows, there was neither any apparent nor alleged “mischief” by state and local government recipients and subrecipients of federal grants that led to either the 1986 or the 2009 FCA Amendments.
Senate Report 99-345 highlighted a case to further illustrate that Congress did not intend for state and local governments to be a “person” subject to FCA liability. Thus, if Congress wanted to include state and local governments as a “person” subject to FCA liability, it could have at least opined on whether not only an individual employee, but also a municipal housing authority/local government, is subject to FCA liability.
Like House Report 99-660, Senate Report 99-345 also stated that the intent of the 1986 FCA Amendments definition of “claim” was to clarify that a false claim is actionable although claims or false statements were made to a party other than the federal government, if the payment thereon would ultimately result in a loss to the United States. Senate Report 99-345 also expressly indicated that a new subsection (d) of the FCA’s liability provisions (i.e., 31 U.S.C. § 3729(d)), clarifies that the statute permits the federal government to sue under the False Claims Acts for frauds perpetrated on (i.e., not by) federal grantees, including states and other recipients of federal funds.
As was the case with the 1986 FCA Amendments, the legislative history of the 2009 FCA Amendments is devoid of any concern by Congress over alleged fraud by state and local government subrecipients of federal grants, but rather focuses on fraud against and upon state and local government grant recipients and subrecipients. Thus, the FCA Amendments of 2009 sought to “correct and clarify erroneous interpretations of the law that were decided in Allison Engine Co. v. United States ex rel. Sanders, 553 U.S. 662 (2008), and United States ex rel. Totten v. Bombardier Corp., 380 F.3d 488 (D.C. Cir.2004).”
Another principle of statutory interpretation is that the words of a statute will not be interpreted in such a way as to yield absurd result or result in outcomes that are demonstrably inconsistent with clear congressional intent. Erroneous interpretations of the 1986 FCA Amendments liability provisions definition of “person” to include state and local governments have led to absurd results. Furthermore, erroneous interpretations of the definitions of “claim” from the 1986 and 2009 FCA Amendments have also led to absurd results and fly in the face of clear congressional intent to remedy fraudulent claims presented to, and not by, state and local government recipients and subrecipients of federal grants.
As the Supreme Court recognized in Vermont Agency of Natural Resources, the FCA is no longer just a remedial statute, but is also now a punitive statute due to its treble damages and substantial penalties per false claim and/or false statement. Consequently, the punitive impact of imposing FCA liability on state governments is the same regardless of whether the plaintiff is a private citizen/qui tam relator or the federal government/DoJ.
Furthermore, neither the 1986 nor the 2009 FCA Amendments liability provisions distinguish between a private citizen (qui tam relator) plaintiff and government (DoJ) plaintiff. As a result of dicta in Vermont Agency of Natural Resources, DoJ has answered the open question in the affirmative of whether states are “persons” subject to FCA liability when the federal government brings the claim, by bringing actions on behalf of the United States against state entities (i.e., arms of the state).
Since Vermont Agency of Natural Resources, some lower courts have created an absurd patchwork of different and sometimes conflicting interpretations of what is (e.g., health departments, corrections departments) and what is not (e.g., housing agencies, hospitals, school districts) a state entity or “arm of the state.” Moreover, several circuit courts have identified a multitude of factors for determining if a state entity is an arm of the state.
a. State Agencies/Departments
In a group of related Supplemental Nutrition Assistance Program (SNAP) benefits cases, DoJ settled with eight state agencies to resolve allegations of FCA violations in their administration of the program. Each of the state agencies contracted with Julie Osnes Consulting to provide advice and recommendations designed to lower its SNAP quality control error rate.
b. State Institutions of Higher Education
As GAO has noted, “[U]niversity research contributes to American competitiveness and leadership in science.” However, state institutions of higher education recipients of federal grants, which are arguably arms of the state, have increasingly become targets for FCA actions by both qui tam relators and DoJ.
Notably, the University of California, University of Florida, University of Washington, University of Wisconsin, and others, have all settled with DoJ for alleged violations of the FCA. Qui tam relators and/or the DoJ have brought these FCA actions despite other mechanisms available to take punitive action against individuals and recover funds (non-punitively) from state institutions of higher education.
For example, on July 1, 2015, a federal judge for the U.S. District Court for the Southern District of Iowa sentenced Dr. Dong Pyou Han, a former research professor at the Iowa State University (ISU), to fifty-seven months in federal prison and three years of supervised release afterwards, for making false statements to the National Institutes of Health (NIH). As part of his accepted plea agreement, the court ordered Dr. Han to pay NIH $7.2 million in restitution.
With respect to the institution of higher education, NIH rescinded nearly $1.4 million in federal grant funds, and the university agreed to reimburse the federal government $496,000 for salary and other costs related to Dr. Han’s employment. DoJ and NIH did not pursue ISU for FCA violations, instead, resolving the matter administratively with the state institution of higher education while taking punitive action against the individual bad actor.
As previously stated, in Vermont Agency of Natural Resources, the Supreme Court recognized the presumption against imposing punitive damages on state governmental entities. However, in Cook County, the Supreme Court abandoned this presumption with respect to smaller, less fiscally capable local governments, which has led to absurd results.
a. City and/or County Hospitals
In addition to DoJ settlements with private, for-profit hospitals, qui tam relators and DoJ have also brought several FCA cases against local government hospitals. For example, in United States ex rel. Reilly v. North Broward Hospital District, the hospital district, a special taxing district of the State of Florida, settled with DoJ for $69.5 million to settle allegations that it “violated the . . . [FCA] by engaging in improper financial relationships with referring physicians” in violation of the Stark Act. DoJ alleged that the local hospital district “provided compensation to nine employed physicians that exceeded the fair market values of their services.”
b. City and/or County School Districts, Institutions of Higher Education
In United States ex rel. Hunt v. Maricopa County Community College District, Maricopa County Community College District (MCCCD) settled for “$4.08 million to resolve [FCA] allegations . . . that it submitted false claims to the Corporation for National and Community Service (CNCS) concerning AmeriCorps . . . grants” for Project Ayuda, a program that engages students in national service. According to DoJ, MCCCD allegedly improperly certified that students completed the required number of service hours so that they would earn an education award from CNCS. DoJ further alleged that MCCCD also improperly received grant funds from CNCS to administer the project.
c. City and/or County Housing, Transit, and/or Water Authorities
In United States, Virginia and the District of Columbia, ex rel. Shahiq Khwaja v. Washington Metropolitan Area Transit Authority, (WMATA), the transit agency settled with the federal government for $4.2 million to resolve FCA allegations that it violated federal government procurement rules. The qui tam relator originally brought this action against WMATA, the third-party contractor Metaformers, Inc., Edward Bouryng, President of Metaformers, and Carol Kissal, Chief Financial Officer for WMATA (in her official and personal capacity), for alleged violations of the FCA, as well as the District of Columbia and Virginia False Claim Acts. The judge ultimately dismissed the claims against co-defendants Metaformers, Bouryng, and Kissal.
State and local government recipients and subrecipients of federal grants simply do not have the resources to hire enough in-house counsel and/or outside counsel to advise on compliance matters, let alone to mount a robust defense of their actions against FCA lawsuits brought by either qui tam relators or DoJ. As a result, state and local government recipients and subrecipients of federal grants often settle with qui tam relators and DoJ, in part to mitigate the reputational damage that they suffer from the allegations alone. In the rare instances where state and local government recipients and subrecipients of federal grants present false claims, a myriad of less Draconian remedies are available to the federal government to recover its funds and to protect the public fisc.
Congress clearly intended to address healthcare fraud through the 1986 FCA Amendments and the 2010 ACA Amendments, as the overwhelming majority of grant recipient and subrecipient cases involve healthcare programs. To avoid the harsh, punitive penalties of the FCA’s treble damages and per claim penalties, as well as to avoid reputational damages, many defendants simply settle with DoJ and qui tam relators. The most common FCA allegations include violations of the Stark Act, the Anti-Kickback Act, and performance of medically unnecessary or prohibited services in violation of Medicare and Medicaid coverage regulations. A close review of DoJ settlements since 1986 reveals that the most (i.e., quantitatively) and largest (i.e., recoveries) healthcare FCA cases have involved private, for-profit and non-profit hospitals, nursing homes, and institutions of higher education, not state and local government hospitals and institutions of higher education.
Far less draconian remedies than the FCA are available to the federal government to protect its fisc from grant management noncompliance by state and local government recipients and subrecipients of federal grants. Specifically, the federal government can bring the following civil and/or criminal enforcement actions against state and local government recipients and subrecipients of federal grants:
1) administrative remedies;
2) termination for noncompliance; and
3) civil penalties.
The federal government can also use criminal fraud statutes for false claims and false statements against individual bad actors within state and local government agencies.
Throughout the FCA’s history, Congress has amended the statute to “clarify and correct erroneous court decisions.” In the context of state and local government recipients and subrecipients of federal grants, Congress needs to amend the FCA to “clarify and correct erroneous court decisions” in Vermont Agency of Natural Resources and Cook County. Recent enactment of the Infrastructure Investment and Jobs Act, which contains several federal grant programs to state and local governments for bridges, broadband, highways, and roads, as well as DoJ’s new Civil Cyber-Fraud Initiative, makes FCA legislative reform on this issue an even greater necessity.
Specifically, Congress should define “person” in § 3729(a) to expressly exclude state and local governments; and clarify the definition of “claim” to mean presented “to” state and local government recipients and subrecipients of federal grants and not “by” state and local government recipients and subrecipients of federal grants. If Congress wants to impose punitive FCA civil liability on claims presented “by” state and local government recipients and subrecipients of federal grants, it should expressly do so as the Chicago City Council did in its False Claims Ordinance.
Alternatively, if Congress decides to expressly make state and local government recipients and subrecipients of federal grants subject to FCA liability, then it should re-establish the “intent” requirement for state and local government recipients and subrecipients of federal grants presenting false claims or false statements; and/or reduce damages (e.g., double) and penalties (e.g., up to $5,000 per false claim or false statement) for state and local government recipients and subrecipients of federal grants (i.e., similar to Program Fraud Civil Remedies Act of 1986).
As highlighted, no rampant “mischief” by state and local government recipients and subrecipients of federal grants warranted legislative remedy in the 1986 or 2009 FCA Amendments. Since there was no “mischief” by state and local government recipients and subrecipients of federal grants, there was no legislative purpose advanced by subjecting such entities to the FCA’s punitive liability of treble damages and penalties per false claim and/or false statement.
Additionally, the ordinary and plain meaning of “person” with respect to the original 1863 FCA, as well as the 1986 and 2009 FCA Amendments, shows that Congress never intended to subject states and local governments to FCA liability. Moreover, the statutory context of “to grantees” in the definitions of “claim” in the 1986 and 2009 FCA Amendments shows that Congress sought to remedy fraudulent claims presented to state and local government recipients and subrecipients of federal grants, not claims presented by them. The legislative history of the 1986 and 2009 FCA Amendments also shows that Congress intended to remedy fraud against and upon grantees and subgrantees, including state, local governments, and private programs primarily by contractors.
Lastly, erroneous interpretations by courts, qui tam relators, and the DoJ that the 1986 and 2009 FCA Amendments include state and local governments as “persons” subject to FCA liability have led to absurd results. Therefore, legislative action to clarify and correct erroneous interpretations of Vermont Agency of Natural Resources and Cook County is necessary to restore congressional intent of preventing fraudulent claims presented against and upon state government grantees and local government subgrantees.
