False Claims Act Penalties Set for Significant Increase Later This Year

June 3, 2016

By Jacqueline K. Unger

Liability under the False Claims Act (“FCA”) results in the imposition of treble damages and penalties. Government contractors should be aware that the mandatory penalties for FCA violations may nearly double starting in August of 2016.

On November 2, 2015, President Obama signed into law the Federal Civil Penalties Inflation Adjustment Act Improvements Act of 2015 (Sec. 701 of Public Law 114-74) (the “2015 Act”). The 2015 Act requires federal agencies to issue regulations adjusting civil monetary penalties for inflation to retain the deterrent effect of those penalties. Agencies must make a catch-up adjustment for civil monetary penalties with the new levels published by July 1, 2016, to take effect no later than August 1, 2016. Further, agencies are required to make annual inflationary adjustments starting in January 2017 based on the Office of Management and Budget (“OMB”) guidance with adjusted penalties to take effect immediately.

The Department of Justice (“DOJ”) last adjusted the penalties under the FCA in 1999, pursuant to the Debt Collection Improvement Act of 1996, raising penalties 10 percent to a minimum of $5,500 and a maximum of $11,000. The Railroad Retirement Board is the only agency so far to issue its new penalty amounts under the FCA—specifically for railroad claims—setting a new minimum penalty of $10,781 per claim and a new maximum penalty of $21,563 per claim. Other agencies, including DOJ, are expected to increase their FCA penalties to the same amounts. 

These increases are significant because the penalties are automatic and mandatory for each false claim submitted to the government. While the penalties are required only when a judgment is entered against the contractor by the court, the threat of such high penalties gives substantial leverage to the government in negotiating settlements of FCA claims. The mandatory penalties are already a hot topic in the FCA arena because the liability that government contractors rack up in penalties often exceeds any actual harm incurred by the government. For example, a contractor that submits thousands of invoices for a relatively cheap product or service that are found to be improper under the FCA could result in millions of dollars in penalties despite the contractor only being paid a few hundred thousand dollars by the government. In fact, in many FCA cases, the parties dispute whether the resulting penalties violate the Eighth Amendment’s Excessive Fines Clause, which prohibits penalties that are grossly disproportional to the gravity of a defendant’s offense.

This upsurge in FCA mandatory penalties underscores the importance of the U.S. Supreme Court’s upcoming decision in Universal Health Services v. United States ex rel. Escobar, which we wrote about here. If the court rules in favor of the viability of the implied certification theory of liability under the FCA, government contractors could face record penalties for potentially minor breaches of contract or regulation. Ultimately, Eighth Amendment litigation in FCA cases is likely to increase as a result of the new penalties as an avenue to escape the FCA’s onerous monetary consequences.

About the Author: Jackie Unger is an associate with PilieroMazza in the Government Contracts Group. She may be reached at junger@pilieromazza.com.

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