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An FCA suit must allege “materiality,” meaning that a federal contractor’s actions would likely affect whether it got paid by a U.S. agency. Whether armed guards have adequate marksmanship skills, for example, is material to payment decisions under a security services contract.
A 2016 U.S. Supreme Court ruling, Universal Health Services, Inc. v. United States ex rel. Escobar, held a lawsuit could fail for lack of materiality if an agency continued to pay a contractor despite fraudulent conduct.
The False Claims Amendments Act of 2021 (S. 2428), introduced July 22 by Grassley, could “patch this hole” for FCA plaintiffs by putting the burden on company defendants to show materiality wasn’t adequately alleged.
The Justice Department recovered more than $2 billion from FCA cases in 2020 and has recovered more than $64 billion since 1986 amendments to the law, which allowed the government to seek higher damages and increased whistleblower incentives. Grassley, long an FCA stalwart, authored those amendments.
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A contractor shouldn’t get away with fraud because an agency believes severing ties with that company would disrupt vital services, like lifesaving medical care, Grassley insisted in a February 2018 speech on the Senate floor.
“Can you imagine if providers could avoid all accountability because the government decided not to let someone suffer? Then fraudsters could hold the government hostage,” he said.
The bill’s prospects in a Democratic Senate are uncertain, but it has bipartisan support. Sens. Dick Durbin (D-Ill.) and Patrick Leahy (D-Vt.) are cosponsors along with Sen. John Kennedy (R-La.). It would mark the first amendments to the FCA in a little over a decade.
‘Literal Pile of Garbage’
Grassley has also cited a $549 million defense contract for cargo planes that were a “literal pile of garbage” and sold as scrap metal for $40,257. But because DOD continued to pay the contractor, an FCA suit would fail for a lack of materiality, he said March 22.
The bill could help plaintiffs by making the FCA say “the government or relator may establish materiality by a preponderance of the evidence.” A defendant “may rebut an argument of materiality” with “clear and convincing evidence.”
Shifting the materiality burden from plaintiffs to defendants will allow whistleblowers to more easily establish that a bad actor’s conduct could influence a decision maker in deciding to do business with them, said Susan M. Coler, who represents whistleblowers with Halunen Law in Minneapolis.
“It also means a bad actor will have a higher burden show its conduct is not material,” she said.
Under the proposed amendments, “it is likely that in most cases, there will be a question of fact on materiality, and it will no longer serve as the basis for dismissal pursuant to a motion to dismiss or a summary judgment motion,” said Vincent McKnight Jr., who represents whistleblowers with Sanford Heisler Sharp LLP in Washington.
“This restores the proper balance to the False Claims Act,” he said. “There are probably hundreds of cases where defendants have raised credible Escobar defenses that will now evaporate, changing the landscape dramatically as the parties recalibrate their litigation prospects and settlement positions.”
That potential recalibration could explain why FCA defense attorneys don’t like what they see.
These amendments “reflect the recalcitrance of a petulant child not able to come to grips with the Supreme Court’s ‘demanding’ materiality standard,” said Bob Rhoad of Nichols Liu LLP in Washington, a firm that represents federal contractors in false claims litigation.
Rhoad called Grassley’s frustration over the continued payments defense “little more than a straw man fallacy, as courts have not found that such payments are dispositive in and of themselves.”
“Rather,” he said, “they constitute facts demonstrating a lack of materiality.”
These changes “likely run afoul of the Due Process Clause” to the extent they absolve the government or whistleblower of the burden of establishing an essential element of an FCA violation, said Adam Tarosky, who represents FCA defendants with Nixon Peabody LLP in Washington.
The burden-shifting is also “confusing” if the goal was to reduce litigation and arguments over the significance of a government payment decision in the wake of Escobar, said Brian T. McLaughlin of Crowell & Moring LLP in Washington.
Big Wins for Contractors
Since Escobar, Grassley, U.S. attorneys, and whistleblowers have asserted that a court needs to assess a variety of factors when deciding if an alleged false claim is material—not merely stop the inquiry once a defendant shows continued payments.
Some of those factors, besides public health considerations, are whether agencies have enough resources to confront fraud, whether agency officials with power to punish fraudsters were aware of misconduct, and whether agencies stop payments only if they can corroborate fraud claims.
And yet the continued payments defense is responsible for several big victories for contractors, such as a Fifth Circuit ruling in October 2017 that vacated a $663 million verdict over alleged highway guardrail contract fraud.
The Federal Highway Administration paid for and approved of allegedly inferior highway guardrails, so there could be no liability, the court concluded.
- the Fifth Circuit rejected a suit against BP because the Department of the Interior approved of its oil production facility operations despite allegations of regulatory noncompliance;
- the Seventh Circuit rejected an education subsidies fraud case because a college continued to receive federal funding after an investigation;
- the Ninth Circuit rejected an electricity supply fraud suit against Honeywell because the Army continued to make payments after learning of alleged noncompliance; and
- the D.C. Circuit rejected an Iraq logistics fraud case against
Kellogg, Brown & Root Inc.because the company continued to receive a performance-based fee after the government learned of alleged overbilling.
It hasn’t been all bad for the plaintiffs’ side. An Eleventh Circuit ruling in June 2020, which restored $255 million of a $350 million award to a whistleblower, said the whistleblower showed Medicare wouldn’t have paid claims if it knew the facilities were misrepresenting patients’ need for services.
Both sides had hoped the U.S. Supreme Court would clarify materiality with regard to continued payments, but the court has repeatedly declined to revisit the matter.
“It shouldn’t be super hard to prove materiality, but Escobar made it that way for whistleblowers,” Eric R. Havian of whistleblowers law firm Constantine Cannon LLP, in San Francisco.
“When companies lie under government contracts, they shouldn’t beat FCA cases by saying ‘the government kept paying, so they don’t care,’” he said. “That’s not what materiality means.”
If Lockheed Martin were the only company that could provide a weapons system the government needed, and also was committing fraud, the government would have no choice but to continue paying, he said. But the government would also see a potential FCA lawsuit undermined by those payments, he said.
“This amendment will change that,” he said.
This bill would provide clarity to and uniformity from the courts on materiality, and encourage more whistleblowers who may have been reluctant to pursue cases, said Joel M. Androphy, who represents whistleblowers with Berg & Androphy.
“The government often pays for things without knowing something improper is going on. Without whistleblowers, agencies would have no idea they’re being defrauded,” he said.