False Claims: A Growing Concern when Doing Business with State & Local Governments

July 27, 2015

By Michelle E. Litteken

Imagine that you are at your desk reviewing emails when your phone rings. It is a prosecutor from the state attorney general’s office, and he tells you that your company is the subject of a fraud investigation. You are shocked.

You are the president of a successful business, supported by hardworking and diligent employees. Your company does everything above board and you have no idea why the government would be investigating you. The answer may be the False Claims Act (“FCA”), which imposes liability on individuals and companies that defraud the government.

More and more companies have found themselves in this position as states begin to enact FCAs. Earlier this summer, Maryland became one of the latest states to expand its FCA beyond health care claims to cover public contracts. The law imposes liability on persons who present false claims for payment to Maryland governmental entities, misappropriate government property, or conceal or avoid obligations to pay the government. Companies found liable under the Maryland FCA can face a penalty of up to $5,000 for each violation, punitive damages, and possible debarment. The Maryland FCA is very similar to the federal FCA, under which the Department of Justice recovered $5.6 billion in 2014.

The FCA is broader than one may initially think. A “claim” may include every day requests for payment like invoices. This means inaccurate invoices could lead to FCA liability. This is true even if the company did not intend to defraud the government. Courts have held that “a reckless disregard for the truth” is sufficient.

However, FCA cases are not limited to issue with invoices. The government has brought FCA cases against companies for inferior products and failure to comply with regulatory or contractual requirements. Early this year, a company that manufactures guardrails used along highways and interstates faced FCA action in multiple states because the company allegedly falsely claimed that its guardrails met federal safety standards.

Importantly, FCA cases are not limited to the government. Most FCAs include qui tam provisions, which allow individuals to bring a case against a company. An individual can retain counsel and file a complaint alleging a FCA violation in court. In most cases, the individual is a current or former employee of the defendant. The government is given an opportunity to review the allegations and may decide to intervene in the case. If the government declines to intervene, the individual can continue the case on his or her own. But if the case is successful, the qui tam plaintiff may recover a portion of the funds that the government recovers.  

Maryland is not the only state with an FCA. 29 states and the District of Columbia have FCAs, as well as the cities of New York, Chicago, and Philadelphia. The number of states with FCAs will likely increase in the next few years because local governments receive incentives from the federal government. Contractors should be aware of whether the state and local governments they do business with have an FCA. Implementing compliance programs, encouraging open communication, training and educating employees, and conducting internal monitoring can help a contractor avoid FCA liability.

About the author: Michelle Litteken is an associate with PilieroMazza in the Government Contracting and .Litigation law groups. She may be reached at mlitteken@pilieromazza.com.

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