The 2009 FERA Amendments


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In this regard, on May 6, 2009, President Obama signed the Fraud Enforcement and Recovery Act of 2009 (FERA) into law, bringing far-reaching changes to the False Claims Act.

One issue that has been the source of significant litigation over the last few decades is the application of the FCA to construction projects that are federally funded through private entities or state-related entities, such as transportation and transit authorities. While these projects are federally funded, contractors are in contractual privity with the private or state entities rather than with the federal government.

Generally, the federal government provides funding for these projects in one of two ways: indirect or direct funding. Through the first, the federal government makes a general grant of funds to the private entity or state agency, retaining no responsibility for or discretion over disbursement of funds to contractors performing work on the project.

Alternatively, the government retains the project funds and disburses them to the private entities or state agencies upon the presentment of claims for payment based upon payment requests from the contractors on the project. In this manner, the federal government retains direct responsibility for and discretion over the payment process.

The issue that has been hotly debated and vigorously litigated over the last 20 years is whether a claim can be made under the FCA on projects involving indirect funding. In order to understand how the courts have dealt with this issue and how the FERA amendments will impact it in the future, a brief history of the FCA is helpful.

The False Claims Act

The first iteration of the FCA was signed by President Lincoln amidst the turmoil of the Civil War. The Justice Department was overworked and did not have the resources necessary to investigate and prosecute government contractors suspected of fraud in the execution of their war contracts. The most important part of the FCA was the qui tam provision, allowing private citizens with knowledge of a fraud perpetrated by a contractor against the government to bring suit on behalf of the government to recover from the contractors any sums procured through fraud. The relator, as the private citizen is called, received a percentage of the recovered funds as a reward for their whistle-blowing.

Major changes to the FCA were last brought in 1986, and they had been building a library of case law for interpretation until the passage of FERA. Included in the 1986 amendments were increases in the civil penalty for violation of the act; an increase in the reward for the qui tam plaintiff; provisions for attorney fees for the qui tam relator; and employment protection for whistleblowers.

Under the 1986 amendments, a person is liable pursuant to the FCA under several circumstances. The most commonly applied provisions were found at 29 U.S.C. §3729(a)(1-2). Under Section 3729(a)(1), a person is liable if they present a false claim to the government for payment. In connection with the federal funding schemes previously discussed, pursuant to this section, liability for a false claim could only attach on projects involving direct funding. This is so because the “presentment” requirement could only be satisfied if the claim was actually “presented” to the federal government for payment. Where indirect funding was involved, since the funds were generally dispersed to the private or state entity with no discretion or involvement by the federal government, it was not possible to establish a presentment of the claim to the federal government for payment.

Conversely, Section 3729(a)(2) had no such direct presentment requirement in its express language. It imposed liability on any person who knowingly used a “false record or statement to get a false or fraudulent claim paid or approved by the Government.” Given the fact that this section did not contain the express presentment for payment requirement as did Section 3729(a)(1), courts wrestled with the issue of whether a claim could be made out under the FCA pursuant to Section 3729(a)(2) where indirect funding was involved.

Ultimately, the issue was decided in 2008 by the U.S. Supreme Court in Allison Engine Co. v. United States, ex rel. Sanders, where a unanimous court held that a claim can only be established under Section 3729(a)(2) if a false statement is submitted with the intent that it be used to get the government to pay the claim. If there is no intention to cause the government to rely upon the false statement, the statement is not made with the purpose of inducing payment “by the government.” Hence, following Allison Engine, a claim under this section could not be made out where indirect funding was involved because on such projects, the federal government plays no part in the payment decision.

Following the decision in Allison Engine, the state of the law regarding the application of the FCA in federally funded construction projects was relatively clear, and contractors and subcontractors had essentially no potential liability under the FCA in connection with their claims for payment on government construction projects involving indirect funding.

Conversely, contractors and subcontractors were well aware that they faced liability under the FCA for false payment claims or other false statements involving payment decision that were submitted on projects involving direct funding. The Allison Engine court found that the provisions of the FCA made it clear that it was not intended to be an all-purpose anti-fraud statute targeting fraud against private entities rather than the federal government. Thus, an entire segment of federal projects were excluded from the purview of the FCA.

Impact of FERA Amendments

Congress’s passage of the FERA amendments to the FCA was a direct reaction to Allison Engine. The FERA amendments specify that they are to be retroactively applied to any FCA claims pending or before June 7, 2008, which is two days prior to the date Allison Engine was decided. As a further undisguised slap at the Supreme Court’s decision, the FERA amendments are not styled as an amendment to the FCA but rather as “clarifications to the False Claims Act to reflect the original intent of the law.”

Easily the most important amendments are to Sections 3729(a)(1) and (a)(2), now brought together as Section 3729(a)(1)(A-B). The new Section 3729(a)(1) now provides for liability for any person who “(A) knowingly presents, or causes to be presented, a false or fraudulent claim for payment or approval” or “(B) knowingly makes, uses, or causes to be made or used, a false record or statement material to a false or fraudulent claim.” No longer does a claim have to be “paid or approved by the Government.”

Section 3729(a)(2)’s replacement no longer requires an intent to defraud the government through the government approval or payment process. Without this requirement, Congress has effectively overturned the Supreme Court’s holding in Allison Engine. So long as there is an intent to present a false or fraudulent claim or make or use or cause to be made or used a false record or statement on a program in which the government has an interest, FCA liability will attach.

These changes are especially significant given the broad definition of “knowingly” under the FCA: a person acted knowingly if they had actual knowledge of the information, acted in deliberate ignorance of the truth or falsity of the information, or acted in reckless disregard for the truth or falsity of the information. No specific intent to defraud was required.

While there has yet to be any litigation that has reached court opinion on these changes, the potential exists for large liability for small errors. Because someone is acting with the appropriate intent if they have actual knowledge of the information, a simple typographical error made by a contractor could trigger a false claim liability.

Startlingly, the definition of a claim under the FCA has similarly been broadened. A claim that could lead to liability under the FCA now includes “any request or demand, whether under a contract or otherwise, for money or property and whether or not the United States has title to that money or property, that … 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 the Government program or interest, and if the Government provided or has provided any portion of the money or property requested or demanded.”

While this definition does not include money paid for federal employment or as an income subsidy with no restrictions on that individual’s use of the money or property, it likely includes money paid to a contractor or grantee of government funds that may have discretion on how that money is disbursed. Now the FCA does not require reliance by the government, presentment to the government or even participation by the government, so long as a person is obtaining government money.

There are now many situations where the government has played no role, but actual damages and civil penalties could accrue under the FCA. Now more than ever, it is extremely important for government contractors, subcontractors or anyone working on a project in which the government has or claims an interest to be vigilant when completing their payment requests, certifications or any paperwork involved with the project. Any error, however minor it may appear, could become very expensive for the one who made it.

Read more at The Legal Intelligencer

By William D. Clifford and Jeffrey R. Hantz



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