As I wrote two weeks ago, the Department of Justice (DOJ) recently released its annual fiscal year statistics on False Claims Act (FCA) and fraud matters. The report shows Fiscal Year 2019 was another big year for the FCA, as the number of new matters initiated and the amount of monetary recoveries obtained both increased over the previous year. 2019 also brought important FCA decisions from federal courts, including the Supreme Court; potential new avenues for FCA liability; and formal announcements from DOJ. These reveal emerging trends that may have lasting implications for government contractors.
- Cybersecurity Cases Make Their Debut
As the Department of Defense and other federal agencies began rolling out new cybersecurity rules over the first part of the last decade, industry insiders predicted that the rules would eventually spawn FCA litigation. 2019 made good on those predictions with two cases: United States ex rel. Markus v. AeroJet RocketDyne Holdings, Inc. and United States ex rel. Glenn v. Cisco Systems, Inc.
In May, AeroJet, filed in the United States District Court for the Eastern District of California, survived a motion to dismiss, effectively confirming that a federal government contractor may face FCA claims based on allegedly false implied certifications of compliance with federal agency cybersecurity rules, even where the contractor has disclosed non-compliance to the agency. Although a ruling on a motion to dismiss does not necessarily portend future liability, the decision confirmed the viability of FCA litigation based on implied cybersecurity certifications.
Then, in July, Cisco, a case arising out of the United States District Court for the Western District of New York, became the first-ever case in which there has been a payout, either through a judgment or settlement, in an FCA matter brought due to a party’s failure to meet cybersecurity standards. The settlement represents a significant step in the progression of cybersecurity-based FCA litigation.
Look for more cybersecurity-based FCA cases in 2020 and beyond, particularly in the information technology, defense, and homeland security sectors.
- DOJ Announces New Cooperation Guidelines
In May, DOJ announced guidance formalizing how government attorneys will allocate credit to defendants who cooperate with the government in FCA matters. The official guidance expanded on prior informal practices and established the clearest picture yet that DOJ will permit individuals and entities alleged to have committed misconduct to reduce their potential liability under the FCA in exchange for cooperating with the government’s investigation.
Expect DOJ’s guidance to impact defense strategy for FCA investigation targets, leading to increased contractor self-reporting of potential violations.
- Supreme Court Confirms Qui Tam Statute of Limitations
Also in May, the Supreme Court decided Cochise Consultancy, Inc. v. United States ex rel. Hunt, clarifying that the statute of limitations for FCA cases brought by individuals (i.e., qui tam actions) where the government declines to intervene may extend up to ten years if the plaintiff can show when the government knew or should have known of the material facts related to a given false claim. The decision modified Fourth Circuit law, which had previously applied a six-year statute of limitations to such claims. This affects cases arising out of Virginia, West Virginia, Maryland, North Carolina, and South Carolina.
The ruling is likely to increase the number of qui tam cases filed overall; to expand the scope of discovery in non-intervention cases; and to expand potential liability for contractors in affected states that submit recurring invoices to the government.
- DOJ Continues Robust Application of the Granston Memorandum
Approximately two years ago, DOJ issued the Granston Memorandum, which instructed DOJ attorneys, when determining whether the government should intervene in pending litigation, to consider moving to dismiss whistleblower qui tam actions that are not substantially justified, as they may adversely impact the government’s ability to enforce the FCA generally. Since then, the government has moved to dismiss such actions more frequently and has found substantial success on such motions. 2019 was no different, as the rate of filing of government motions to dismiss continued its upward trend. There remains some debate in the federal courts over the standard a court should apply in evaluating the government’s motion to dismiss. DOJ has requested the Supreme Court finally decide the standard in United States ex rel. Schneider v. JPMorgan Chase Bank, N.A., and the Supreme Court is expected to announce whether it will take the case during the first part of 2020.
We anticipate that, continuing with current trends, the government will seek to dismiss unjustified qui tam complaints with more frequency in the year to come.
To assist government contractors and related companies in understanding the FCA and how to avoid FCA liability, PilieroMazza has launched “Ex Rel. Radio,” a multi-part series of our GovCon Live! podcast, which will include commentary on potential pitfalls for your company, enforcement issues, and emerging trends. Ex Rel. Radio is available on Apple Podcasts, Spotify, Google Podcasts, TuneIn, and Stitcher, or you can visit our website at www.pilieromazza.com.