The False Claims Act has a number of subsections under which contractors may be found liable for defrauding the federal government. Contractors may be found liable under subsection (a)(1) only if someone presented a fraudulent bill to the federal government. Subsections (a)(2) and (a)(3) do not spell out the same "presentment" requirement in explicit terms. Do these subsections still include a "presentment" requirement that there be proof that a false bill was sent to the government, or is it enough to show that the fraudulent bill was paid with federal funds?
In 1985, the U.S. Navy contracted with two shipyards for the production of a new fleet of destroyers. Each destroyer required an electrical generator set to provide electricity. Several companies became involved in the project to build the generator sets. None of these companies billed the federal government, but rather billed the company directly above them in the chain of production. The company directly above them did not include these bills when submitting for payment from the government. This case began when two whistleblowers sued their former employer and other government subcontractors under the False Claims Act. The U.S. District Court for the Southern District of Ohio dismissed their claim after holding that no FCA violation could occur without evidence that the federal government actually relied on a fraudulent bill. On appeal, the U.S. Court of Appeals for the Sixth Circuit held that the case should continue because the False Claims Act does not categorically require proof that the fraudulent bill was actually presented to the federal government. The ultimate decision by the Supreme Court could have important economic consequences for taxpayers, government contractors, and any party who seeks to file suit under the False Claims Act.
Questions as Framed for the Court by the Parties
Whether a plaintiff asserting a cause of action under Section 3729(a)(2) or Section 3729(a)(3) of the False Claims Act is required to prove that a false claim was submitted to the federal government, or whether it is sufficient to establish that the claim was paid using federal funds.
In 1863, Congress passed the False Claims Act ("FCA") to address problems associated with private contractors who had cheated the federal government throughout the Civil War. Some contractors, for example, charged the Army for supplies in good condition but delivered spoiled food, defective rifles, and tired mules. President Lincoln hoped that the FCA would provide an effective remedy to curb such practices. Under the FCA's qui tam provision, a private citizen can sue a contractor even if government attorneys decline to help. The private citizen thus becomes a "relator" suing the contractor for damages on behalf of the United States. Successful relators give most of the money damages to the government but are able to keep some as a reward.
In 1985, the U.S. Navy contracted with two shipyards to build new destroyers for its fleet. Both shipyards subcontracted with other companies to acquire necessary parts. Among the necessary parts were generators to supply electricity ("Gen-Sets"). The shipyards ordered Gen-Sets from the Allison Engine Company ("Allison"), which was then a division of General Motors ("GM"). Allison then outsourced some of the work to the General Tool Company ("GTC"), which further subcontracted with Southern Ohio Fabricators ("SOFCO"). As former employees of GTC, Roger Sanders and Roger Thacker worked on the Gen-Set assembly teams and suspected the Gen-Sets to be defective. They filed two FCA actions against Allison, GM, GTC, and SOFCO in 1995.
The U.S. District Court for the Southern District of Ohio consolidated the FCA actions into one case. One action accused the subcontractors of hiding unfavorable data during price negotiations. The court, however, held that the subcontractors had no duty to disclose a mere possibility that their costs might decrease. The other action accused the subcontractors of knowingly sending bills for defective Gen-Sets. The court again ruled for the subcontractors, explaining that Sanders and Thacker failed to show any false claim actually presented to the U.S. government. The court reasoned that to prove an FCA violation, one must establish a causal link from the allegedly false claims to the disbursement of government funds. It was not enough, in other words, that each subcontractor got paid with government funds; the court also wanted proof that at least one invoice sent to the government included the allegedly fraudulent amounts charged for the Gen-Sets.
The U.S. Court of Appeals for the Sixth Circuit upheld the district court's first judgment but reversed the second. A split three-judge panel held that the FCA does not always require evidence of false claims actually presented to the government. The court found that under two sections of the FCA, Sanders and Thacker could maintain their claim without actually linking the disbursement of government funds to the allegedly fraudulent bills. The court concluded that so long as the money came from government funds, simply charging another subcontractor for defective parts could violate the FCA. Arguing against this conclusion, the subcontractors appealed to the U.S. Supreme Court, which granted certiorari on October 29, 2007.
The 3729(a)(2) Question
The False Claims Act ("FCA"), 31 U.S.C. § 3729(a)(2) imposes liability upon anyone who "knowingly makes, uses, or causes to be made or used, a false record or statement to get a false or fraudulent claim paid or approved by the [federal] government." Similarly, 31 U.S.C. § 3729(a)(1) holds liable anyone who "knowingly presents, or causes to presented" such a claim "to an officer or employee or the United States Government."
In United States ex rel. Totten v. Bombardier Corp., the D.C. Circuit examined whether submission of a false claim to Amtrak which Amtrak paid with federal funds violated the False Claims Act. In concluding that it did not, the D.C. Circuit held that subsection (a)(2) contained a presentment requirement, meaning that a violation of (a)(2) only occurs after submission of a fraudulent claim to the government itself, rather than to a middleman organization. The court supported its decision by pointing to (a)(2)'s language "paid or approved by the government." This language, the court concluded, reinforced the distinction between the government and government contractors. Allison Engine Co. ("Allison") similarly points to the plain language of (a)(2), emphasizing that the statute says "paid or approved by the government" rather than "paid with government funds or approved by a recipient of government funds."
The U.S. Supreme Court had previously distinguished between the government and private organizations receiving government money, such as government contractors, in Tanner v. U.S. In Tanner, the Court held that a conspiracy to swindle a private company which received federal funds was not a conspiracy against the United States. However, Tanner was decided under 18 U.S.C. 371 rather than under the False Claims Act.
Sanders and Thacker argue that applying Tanner to the FCA is improper because Tanner analyzed a different statute. They emphasize that each statute has different goals, and cite to United States v. Neifert-White Co., in which the Court said that the FCA is meant "to reach all types of fraud, without qualification, that might result in financial loss to the Government."
To further support this broad interpretation of the FCA, Sanders and Thacker point to 31 U.S.C. § 3729(c), which defines "claim" for purposes of the FCA. Under subsection (c), a claim includes requests for money submitted to a third party if the U.S. Government reimburses the third party for any of the money requested. Based on this definition, Sanders and Thacker state that liability under (a)(2) for having a false claim paid or approved by the government includes more than liability for fraudulently seeking government money through an invoice sent to the government. Rather, it means that the persons must seek government money in general. Otherwise, they claim, the definition of "claim" in subsection (c) would be meaningless. They compare their interpretation to a student whose expenses are paid by his parents. The student's parents do not send money directly to his creditors, but rather are the ultimate source of the money used to pay the expenses.
Allison argues that such an interpretation substitutes "paid or approved by the government" with "paid or approved by anyone receiving federal financial assistance." Instead, Allison proposes that subsection (c) imposes liability upon persons submitting a claim to a third party if they afterwards submit the claim to the government. Sanders and Thacker point to the plain language of (a)(2), which contains no express presentment requirement. They claim that a presentment requirement would add an extra element of liability to prove beyond what the plain language requires.
In Totten, the D.C. Circuit further supported its distinction between the government and government contractors by reasoning that subsections (a)(1) and (a)(2) used to be part of the same subsection, and since (a)(1) explicitly has a presentment requirement, subsection (a)(2) must as well. Allison builds upon the D.C. Circuit's argument by stating that (a)(1) and (a)(2) serve complementary functions. If (a)(2) does not also contain a presentment requirement, plaintiffs would be able to avoid (a)(1)'s presentment requirement by suing under (a)(2), according to Allison. Plaintiffs could do so by asserting that the false claim under (a)(1) was a "false record or statement" for purposes of (a)(2). Allison claims that this would render (a)(1) useless, and notes the Supreme Court has repeatedly cautioned against interpreting one section of a statute in a way that would nullify another.
Sanders and Thacker counter on the grounds that Allison's interpretation renders (a)(2) meaningless. They state that presentment of a "false record or statement" under (a)(2) would be just a type of (a)(1)'s presentment of a false claim. Instead, according to Sanders and Thacker, (a)(1) and (a)(2) include two distinct types of prohibited conduct: presentment of a false claim and making or using a false record.
The 3729(a)(3) Question
The False Claims Act ("FCA"), 31 U.S.C. § 3729(a)(3) imposes liability upon persons conspiring to defraud the federal government "by getting a false or fraudulent claim allowed or paid."
Allison insists that subsection (a)(3) only applies to conspiracies to submit a false claim to the government rather than conspiracies to submit a false claim to a third party ultimately reimbursed by the government. It supports this position by saying the language reads "conspiring to defraud the federal government" rather than "conspiring to defraud recipients of federal funding." Furthermore, it claims that liability under (a)(3) is limited by the scope of liability in subsections (a)(1) and (a)(2), where (it argues) there is a presentment requirement. The Sixth Circuit held, and Sanders and Thacker argue, that subsection (a)(3) is distinct from subsections (a)(1) and (a)(2). Sanders and Thacker emphasize that it imposes liability on different conduct-conspiracy, and therefore liability under (a)(3) cannot be derivative of liability under the previous subsections. If (a)(3) had a presentment requirement, they insist, conspiracy liability under (a)(3) would just be a type of conduct which violates (a)(1) rather than its own separate provision.
Allison argues that the Sixth Circuit's holding that there is no presentment requirement in subsections (a)(2) and (a)(3) applies the FCA to conduct which Congress never intended for it to cover. Rather than cover false claims for government money, the FCA would apply to all false claims submitted to any recipient of federal money, including local schools and universities. This, they argue, would mean that any false claim submitted to a government contractor would fall under the FCA, regardless of whether the claim was for work benefiting the government. Such claims, Allison states, are properly dealt with by state rather than federal law. Sanders and Thacker counter that a presentment requirement would restrict the FCA beyond what Congress intended. Congress intended, they state, for false claims submitted to Medicare and Medicaid to be actionable under the FCA. However, such claims are not submitted to the government and thus, they claim, would be wrongfully precluded under Allison's interpretation.
The outcome of this case will determine whether a party can violate the False Claims Act only if the federal government disburses money in response to a fraudulent bill, or whether it is enough if a third party pays the fraudulent bill with previously disbursed government funds. According to Sanders and Thacker, the two whistleblowers who started this case, the FCA should apply to anyone who sends a fraudulent bill for an excessive amount of federal government money. According to the defendants, the FCA should apply only to parties whose fraudulent claims influence directly the disbursement of funds by the federal government.
A win for Sanders and Thacker would expose to potential FCA liability many parties that now consider themselves immune from the FCA. Many companies perform work for the federal government and get paid with federal funds. Yet only some of these companies bill the federal government directly. The remaining companies simply bill the private parties immediately above them in the chain of production. See In United States ex rel. Totten v. Bombardier Corp., Edward Totten alleged that two companies violated the FCA by overcharging Amtrak for defective railroad cars. Amtrak relied on subsidies from the federal government to fund its business, and Totten reasoned that overcharging Amtrak was the same as overcharging the federal government. Totten lost, however, when the Court of Appeals for the D.C. Circuit held that bills could only violate the FCA if actually relied on by the federal government when it disbursed funds. The D.C. Circuit does not have mandatory authority outside its jurisdictional area, but courts around the country adopted its reasoning and dismissed many FCA suits.
Unsurprisingly, Sanders and Thacker have the support of parties that would stand to benefit from a broader interpretation of the FCA. The U.S. government, for example, receives the bulk of any award obtained in an FCA action on its behalf. The U.S. Department of Justice thus urges that the FCA should be interpreted broadly so that private parties cannot cheat American taxpayers and escape liability merely because they billed an intermediate entity that paid with previously disbursed government funds. A private citizen named Marsha Farmer also supports Sanders and Thacker because a court recently cited Totten to dismiss an FCA lawsuit of her own. Senator Charles Grassley, who in 1986 sponsored amendments to the FCA, supports a broadly construed FCA as well: "Given the absence of any reference to presentment in the plain language of [the relevant] provisions . . . it is not surprising that [Sanders and Thacker should win]."
Meanwhile, the defendants enjoy the support of parties that rely on a narrow interpretation of the FCA to save costs. Speaking on behalf of the business community, the U.S. Chamber of Commerce warns that a broadly interpreted FCA would force government subcontractors to charge higher prices to offset the risk of additional lawsuits. Even the most honest government subcontractor would need to buy additional insurance or set aside extra funds to defend against possible FCA suits. The American Hospital Association (AHA) and American Health Care Association (AHCA) point out that most FCA lawsuits involve accusations of health care fraud. The AHA and AHCA claim that the vast majority of these accusations prove baseless once they reach trial. To keep health care costs down, the AHA and AHCA argue that providers who never bill the federal government should never have to face the threat of a lawsuit under the FCA. The Washington Legal Foundation (WLF) elaborates on this point through the logic of no-harm, no-foul: "there must be a causal link between the fraud . . . and the Federal Government's decision to pay the claim." According to the WLF, it makes no sense to label something a fraud on the federal government without proof that the federal government paid more money because of the fraud.
Interestingly, both sides in the debate claim to represent the public interest because they offer different views about the true victims of fraud by government subcontractors. For supporters of a narrowly interpreted FCA, fraudulent billing by subcontractors injures only the contractor that actually distributes government funds. They argue that when the government disburses a fixed amount of money for a project, a fraudulent bill between subcontractors causes no harm to the taxpayers. Any fraud between government contractors will thus "come out of the prime contractor's pocket . . . ." Taxpayers Against Fraud ("TAF"), responds that taxpayers should not have to depend on private contractors to expose wasteful spending of taxpayer money. In a specialized market with few competitors, fraudulent billing may be so common that the prime contractor just takes inflated prices into account when negotiating a contract with the government. Thus, an original disbursement of government funds may already be inflated to reflect fraud. The way to combat such fraud, concludes TAF, is to allow anyone to sue under the FCA as long as they can expose a fraudulent claim for taxpayer funds.
In Allison Engine Co. v. U.S., the Supreme Court will clarify who may be held liable under the federal False Claims Act. If the Court decides for Sanders and Thacker, a party who submits a false claim to a federal government contractor may be held liable even if the false claim is never submitted to the government. If the Court instead finds for Allison and its co-defendants, a party engaged in fraudulent acts may not be held liable under the False Claims Act unless the federal government receives the false claim. Regardless of how the Court decides, this case will affect how fraud in federal government contracts is responded to and will also impact the U.S. treasury and taxpayers.