The impact of Federal, State, and local False Claims Acts on the construction industry.

• Author: Kinberg, Edward J.
• Position: Real Property, Probate and Trust Law

The Federal False Claims Act (1) (FCA) became law in 1863. Although it was originally intended to fight fraud by defense contractors, the majority of cases filed in the last few years involve medical and pharmaceutical claims. (2) Given the recent changes in the FCA and increased federally funded spending on construction projects, it is likely the construction industry will experience an increase in FCA claims. In addition, the reporting requirements of the American Recovery and Reinvestment Act of 2009 (3) (ARRA), the overall increase in federal funding for contractor oversight, and the weak economy are all likely to result in an increase in the number of FCA actions against construction contractors. (4)

As the ARRA substantially increases access to federal funds by state and local governments, construction contractors that have little experience contracting with federal funds will for the first time have to comply with the many federal laws and regulations involved in government contracting. Each contract awarded with ARRA funds requires full compliance with the ARRA's reporting requirements as well as a number of other federal statutes and regulations, such as the Davis-Bacon Act (5) (prevailing wages) and the Buy American Act. (6)

The FCA not only provides for actions by the government against a contractor, but also allows for suit by private individuals through its qui tam (7) provisions, which allow a private citizen (referred to as the "relator" in a qui tam suit) to bring suit on behalf of the government and share in the recovery. (8) Qui tam lawsuits are filed under seal (9) by individuals on behalf of the government and remain under seal for a minimum of 60 days to allow the Department of Justice (DOJ) to evaluate the suit and decide if it will intervene. If the government does intervene, it will take over primary responsibility for pursuing the suit. The vast majority of lawsuits filed under the FCA are filed by private citizens, with the government intervening approximately 25 percent (10) of the time.

If anyone aware of a contractor's reporting practices believes, whether mistakenly or not, that a contractor's reports are false, they can bring a qui tam suit against the contractor. Given the financial rewards available to relators, the high cost of defending a qui tam suit, and the threat of exclusion from contracting with the government if the action is successful, most FCA lawsuits are settled.

If the government intervenes, the relator will receive between 15 percent and 25 percent of the damages recovered by the government. If the government does not intervene in the suit, the amount that can be awarded to the relator increases to 30 percent of the recovery. Damages under the FCA include a fine of $5,500 to $11,000 for each false claim, three times the amount of the false claims and attorneys' fees for the relator. In addition, the government may also pursue administrative remedies, such as suspension or debarment from federal contracting, criminal prosecution, and contractual damages.

Over the years, several states, including Florida, (11) have enacted their own false claims act. In addition, several counties and municipalities in Florida have also passed false claims ordinances. (12) While the federal and Florida laws use "contractor" in the broadest sense of the word, i.e., any business that provides goods for services to the federal or state government, the county and local ordinances, as discussed in more detail below, are specifically focused on the construction industry. Each of those ordinances has definitions that, in this author's opinion, are most commonly found in construction claims, such as extended overhead. (13)

From this author's perspective, the use of qui tam lawsuits will expand significantly in the next few years, particularly in the construction industry, which has not experienced wide spread application of the FCA. Although the FCA was originally intended to focus on defense contractors, the largest source of federal procurement in 1863, most lawsuits and recoveries for the last 10 years or so have involved medical cases of all types. Given the substantial growth in qui tam lawsuits in the last 20 years and the recent changes to the FCA, the use of qui tam lawsuits will significantly expand over the next few years. Although this article will focus on the application of the false claims laws in the construction industry, the issues discussed in this article apply to any business that sells goods or services to a public agency.

This article begins with a brief (in lawyer terms) discussion of the basic provisions of the FCA and how those provisions have been changed by the Fraud Enforcement and Recovery Act (14) (FERA) and conclude with a discussion of how those provisions can impact the construction industry.

The False Claims--Basic Rules

Qui tam lawsuits are frequently filed by an employee of a company alleging that his or her employer has violated the FCA, violations which the employee may be aware of because he or she participated in the fraud. Under the "whistleblower" provisions of the FCA, a company may not take retaliatory action against the individual that filed the suit. (15) In any event, since a qui tam suit is filed under seal for a minimum of 60 days, (16) the individual that brought the suit may continue to accumulate company records to support the qui tam suit. During that period, the government may investigate the allegations to determine if it is in the best interests of the government to intervene and assume primary responsibility for the suit.

If the government does intervene, the relator remains a party to the suit and is entitled to receive between 15 percent and 25 percent of the ultimate recovery by the government. There are two types of potential recovery: 1) a fine of between $5,500 and $11,000 for each false claim, (17) and 2) damage equal to three times the amount recovered. (18) In addition, the relator will recover attorneys' fees and costs. (19)

The FCA provides for four instances in which a suit may not be brought by a private individual. (20) The exception that is commonly litigated is the public disclosure exception, which has its own exception, i.e., it does not apply if the person...