Contractors could face growing number of 'false claims' suits.

• Author: Cassidy, Susan

Under a recent court decision by the Fourth Circuit, a federal government contractor may suddenly find itself facing potentially massive liability based solely on the number of invoices submitted in previous years, even if every one of those invoices was entirely accurate.

If allowed to stand, the Fourth Circuit's ruling in United States ex rel. Bunk v. Gosselin World Wide Moving, N.V., 741 F.3d 390 (4th Cir. 2013) will make the defense industry more vulnerable to a growing number of suits brought under the False Claims Act.

Under the so-called "per-invoice rule" adopted in the case, contractors could be subject to millions of dollars in civil penalties under the FCA based solely on how often they happen to invoice the government, even if the government has not suffered any damages.

Because the Fourth Circuit's jurisdiction spans the Washington, D.C., metro area--where many defense contractors are based--the rule's impact may be acutely felt in the defense sector.

A petition for the Supreme Court to review this case is pending. The petition can be accessed online at http://bit.ly/UMO0r0. The case is being watched closely by the industry.

The mechanical per-invoice rule is not only wrong as a matter of law, but it also subjects contractors to legal and monetary risks that are disproportionate to the benefits they gain from participation in federal procurement.

Defense contractors are well aware of the liability risks posed by the ever-expanding FCA. The pace and scope of the act's enforcement actions have mushroomed in recent years, driven in part by aggressive theories of liability and by the rise of increasingly sophisticated and opportunistic private qui tam lawsuits.

Under the FCA, a private citizen may sue an individual or a business that is defrauding the government and recover funds on the government's behalf This qui tarn lawsuit is filed "under seal," meaning that it is kept secret from everyone but the government to give the Department of Justice time to investigate the allegations and to decide if it wants to join or "intervene" in the lawsuit. Even the person or contractor being accused of fraud is not told about the qui tam case.

Relators have every incentive to "find" fraud at defense contractors. The relator's share of an award ranges from 15 to 25 percent--and up to 30 percent if the Justice Department declines to intervene. Of the $4.9 billion in fiscal year 2012 recoveries from all industry sectors, a record $3.3 billion...