Government Contracts Federal Forecaster - Part 2

CHANGES TO THE FEDERAL FALSE CLAIM S ACT ARE ON THE HORIZON
By Andrew L. Hurst, Gregory S. Jacobs, Andrew C. Bernasconi & Nathan R. Fennessy

On May 20, 2009, the President signed into law the Fraud Enforcement and Recovery Act of 2009 ("FERA"), which will implement significant changes to the federal False Claims Act ("FCA"). The amendments to the FCA will significantly expand the scope of FCA liability while at the same time making it easier for quitam relators to bring and maintain FCA suits on behalf of the government.

Fraud Enforcement and Recovery Act of 2009

Significant Changes to FCA Liability Provisions

The House and Senate both passed the bill with overwhelming majorities before the President signed FERA into law. While the new law is primarily targeted at potential fraud involving recipients of economic stimulus funds in the financial services industry, it also includes some very significant changes to the liability provisions of the federal False Claims Act.

• First, the legislation includes amendments to the FCA's requirements that false statements or records created in support of false claims must be used "to get" a false claim paid by "the Government." The new law removes the requirement of proving that false records and statements be supplied with the "intent" of getting false claims paid, as the unanimous Supreme Court otherwise required in the Allison Engine Co. v. United States ex rel. Sanders decision. In an attempt to confine FCA actions to fraudulent claims directed at the U.S. Treasury, the new law provides that FCA liability will hinge on whether the false record or statement was "material" to getting a false claim paid or approved. The new law defines this new term "material" as "having a natural tendency to influence, or be capable of influencing, the payment or receipt of money or property," which is a broader definition of "materiality" than has been adopted by many courts.
• Second, the legislation expands FCA liability to include any false claim for government money or property regardless of whether the claim was submitted directly to a government official or employee. The new law eliminates the "presentment" requirement within the current form of 31 U.S.C. § 3729(a)(1) (to be codified as § 3729(a)(1) (A)), which required that a claim be submitted to "an officer or employee of the United States Government or a member of the Armed Forces of the United States" in order for FCA liability to attach. Under the new law, FCA liability attaches so long as the person "knowingly presents, or causes to be presented, a false or fraudulent claim for payment or approval" to any entity. For example, any false or fraudulent claim submitted by a subcontractor to a prime contractor receiving federal funds could lead to FCA liability.
• Third, the new law expands the scope of the types of "claims" submitted to the government that can trigger potential FCA liability. Under the new law, a "claim" now includes demands for money and property even if the United States government does not have title to the money or property. In other words, the new law would impose FCA liability for any subcontractor who submits claims to any recipient of government funds, even where the claim cannot be directly traced back to money from the government. The scope of FCA liability under this standard is virtually limitless, particularly in the hands of creative relators' counsel. The new law does include one important limitation, requiring that a "claim" be a demand for money or property that is "to be spent or used on the Government's behalf or to advance a Government program or interest," thus excluding fraud that is unrelated to the government.
• Fourth, the new law provides, for the first time, a definition of "obligation" under the so-called "reverse false claims" provisions of the FCA (31 U.S.C. § 3729(a)(7), which under the new law will become § 3729(a)(1)(G)). The reverse false claims act provisions, under the current FCA and under the new provisions, generally establish liability for a person who knowingly uses a false record or statement to conceal or avoid paying or returning government funds that it is otherwise obligated to return. Under the current FCA, there is no definition of the "obligation," and it has been left for the courts to interpret the term. The new law defines an "obligation" to pay or re-pay government funds when there is an "established duty, whether or not fixed, arising from an express or implied contractual, grantor-grantee, or licensor-licensee relationship, from a fee-based or similar relationship, from statute or regulation, or from the retention of any overpayment." The practical effect of this new provision is to impose FCA liability for any alleged failure to pay or re-pay the government, based on the government's or relator's interpretation of any and all statutory, regulatory, contractual and other requirements—even when there has been no prior judgment or determination that the defendant owed the money to the government.
• Fifth, the new law expands the scope of liability under the conspiracy provisions of the FCA. Previously, FCA liability only applied to a conspiracy to get a false or fraudulent claim paid. Under the new law, FCA liability extends to any conspiracy to violate any requirement of the FCA.
• Sixth, the new law includes an expanded scope of whistleblower employment discrimination protection. While the current provision only addresses retaliation claims by "employees," the new law dramatically increases the scope of potential liability by providing a cause of action for alleged retaliation against employees, contractors, and agents engaged in any "other efforts" to stop a violation of the FCA.
• Seventh, the new law includes a brand new provision establishing mandatory liability for the government's costs in recovering penalties and damages for defendants that have violated the FCA.

Significant Changes to FCA Procedural Provisions

In addition to the changes made to the liability provisions of the FCA, the bill includes a number of changes to procedural provisions of the FCA.

• First, the new law will allow the government to further delay its decision to intervene in a qui tam suit by specifically allowing new complaints or amendments to a relator's complaint filed by the government to "relate back" to the date of the original complaint for purposes of the statute of limitations. This new provision will undermine the ability of businesses to defend themselves (because of difficulties in dredging up documents and witnesses with personal knowledge to support defenses many years after the fact) and increase the costs of litigation, as the delayed government intervention may prolong already protracted lawsuits.
• Second, the new law removes restrictions on the sharing of information obtained from a Civil Investigative Demand ("CID"). Currently, the information obtained from a CID cannot be shared with relators or their counsel except in exceptional circumstances. Under the new provisions, "any information may be shared with any qui tam relator if the attorney general or his designee determines it is necessary as part of any false claims act investigation." This revision has the potential to undercut both the public disclosure jurisdictional bar and the pleading requirement of specifying instances of fraud with particularity because it specifically allows a relator to obtain information outside his personal knowledge to support a qui tam suit.
• Third, the new law allows the government and relators to serve complaints and related information—even while those documents remain under seal in accordance with FCA procedure—on applicable state and local law enforcement agencies, in qui tam cases where the applicable state or local government is named as a co-plaintiff in the action. This sharing of information for investigative purposes increases the likelihood that businesses, already subject to potential liability under the federal FCA, could be subject to further state or local government investigations.
• Fourth, the new law provides for retroactive application of certain amendments to the FCA. For example, the new law provides that the amendments corresponding to section 3729(a)(2) of the current FCA (to be codified as § 3729(a)(1)(B) under the new law) shall apply retroactively to all claims pending as of June 7, 2008—the date that Allison Engine became law. The new law also provides for retroactive application of the amendments to the statute of limitations provisions, the CID provisions, and the sealing provisions to all cases pending at the date of enactment. These retroactivity provisions, which are of questionable constitutionality, threaten to throw the last year of qui tam litigation into complete chaos. Relators who have had their cases dismissed for failing to meet the requirements of Allison Engine within the past year will have a second bite at the apple to meet the new standard. Further, pending qui tam suits on the verge of being dismissed for failing to file within the statute of limitations will be given a stay of execution.

What These Proposed Changes Mean For You

The new legislation will significantly aid a relator's ability to bring a qui tam case under the FCA and keep it in court once he or she does. Perhaps most significantly, the passage of these amendments to the FCA will extend potential liability to all fraud committed against contractors and grantees of the United States government. No longer will qui tam relators and the government be required to show that fraud was committed directly against the United States government or that there was an intent to defraud the government. Potential FCA liability will attach once a government subcontractor provides a false record or statement (even if it is to a contractor), so long as it is "material" to a false claim being paid by the government (even if the subcontractor has no "intent" to defraud the government). Furthermore, the expanded definition of claim will potentially expand the scope of FCA liability to any number of contractual relationships far removed from the government, particularly in the hands of creative relators' counsel who will only need to demonstrate that the money was "to be spent or used on the Government's behalf or to advance a Government program or interest."

The new procedural provisions will also undermine the ability of businesses to defend themselves in qui tam suits. The government will now be able to sit on the sidelines for years beyond the statute of limitations before swooping into an existing qui tam suit with new allegations in an amended complaint. The new provisions regarding the sharing of information gathered from CIDs will also stack the deck against the defendant in a qui tam suit. A relator with little personal knowledge of the alleged false claims will now have access to an enormous amount of information, which the relator may be able to use in support of its qui tam suit. Finally, the retroactivity provisions threaten to throw the status of thousands of cases currently pending into complete disarray.

With the passage of this new legislation into law, the scope of potential FCA liability for any subcontractor doing work with a federal contractor will dramatically increase.

DON'T LET THE NEW BUNDLING RULES CATCH YOU: HOW NEW REQUIREMENTS FROM CONGRESS AND THE FEDERAL ELECTION COMMISSION WILL AFFECT THE DISCLOSURE OF CERTAIN CAMPAIGN CONTRIBUTIONS
By Robert Helland

Responding to scandals regarding the influence of Members of Congress by those who lobby them, Congress passed the "Honest Leadership and Open Government Act of 2007" ("HLOGA"), which was signed into law by President Bush on Sept. 14, 2007. Pub. Law 110-81. HLOGA greatly restricts the ability of lobbyists, and those who hire them, to provide gifts, travel, food, or lodging to either Members of Congress or their staff. In addition, it toughens disclosure requirements concerning the contributions made by lobbyists to those campaigning for federal office.

One of the new disclosure requirements relates to the process known as "bundling," where one person gathers campaign contributions from others and then presents them in total to a campaign. With the continued emphasis on fundraising, "bundlers" now have taken special prominence in federal campaigns, where they are often rewarded and given greater visibility for gathering contributions in excess of a certain total. Section 204 of HLOGA addressed the process of bundling by requiring campaign committees to disclose the name and address of those who provide two or more bundled contributions over an inflation-adjusted amount (currently $16,000) and within a semi-annual period. These disclosure requirements were to take effect 30 days after additional rules on the practice of bundling were promulgated by the Federal Election Commission ("FEC"), and then became final. 11 C.F.R. §§ 100, 104, 110. This effective date was March 19, 2009.

This article analyzes the requirements put in place by Congress and how they will affect how campaign contributions are made.

The Definition of Bundled Contribution Makes Clear that the Actions of a Second Person are Required

Under HLOGA, a bundled contribution is defined as a campaign contribution made by one person that is either (1) forwarded to a campaign by another; or (2) received by a campaign and recognized as having been contributed through the actions of another. 2 U.S.C. § 434(i)(8). Congress' concern is with the fact that one person solicits and controls the contributions of another. Put another way, a person cannot bundle his or her contribution—someone else must be involved. That involvement can either be overt, as when a bundler delivers checks to a campaign, or covert, as when checks are received by a campaign as a result of the actions of one person and understood as such.

The Reach of the New Disclosure Rules is Limited

Under HLOGA, the bundling contributions apply only to (1) those who register as lobbyists with the House of Representatives or Senate; (2) those who employ lobbyists with the House of Representatives or Senate; and (3) political action committees ("PACs"). 2 U.S.C. § 434(i)(7). This is a defined group of those doing business with Congress or involved with making political contributions to political candidates. However, the inclusion of "those who employ lobbyists" could be troublesome for any firm or company that employs both lobbyists and non-lobbyists. This raises the possibility that the bundling rules could apply to all persons who work for such companies, regardless of whether those persons' work involves lobbying. The FEC addressed this in their rules and noted that "non-lobbyist employees...who forward bundled contributions or receive credit from a [campaign] for bundling contributions are outside the scope of HLOGA Section 204." 11 C.F.R. § 104.22(a)(2). This does not apply, however, to non-lobbyist employees who bundle contributions at the request of lobbyist employees. Id.

For 2009, the Disclosure Requirements Affect Only Those Who Provide Two or More Contributions Exceeding $16,000 Over a Semi-Annual Period

Under HLOGA, disclosure requirements are triggered only when two or more contributions exceeding a certain amount are received from a bundler by a campaign committee during a semi-annual period. 2 U.S.C. § 434(i)(1-3). Congress set the threshold amount at $15,000 but required the FEC to adjust that amount for inflation. Id. For 2009, the FEC set the threshold amount at $16,000. 11 C.F.R § 100.

What Must be Disclosed and Who Must Disclose It

Under HLOGA, campaign committees must disclose to the FEC the name, address, and employer of each person that it reasonably knows to meet disclosure rules. 2 U.S.C. § 434(i)(1). The campaign alone has the burden of disclosure. Anyone who handles the campaign contributions of others is not required to file disclosure forms with the FEC. As for what constitutes "reasonably knows," the FEC requires each campaign to check its own records for amounts contributed, as well as websites maintained by the Clerk of the House of Representatives, Secretary of the Senate, and the FEC to determine lobbying or PAC status. 11 C.F.R. § 104.22

How Bundling Rules Will Affect the Practice of Hosting a Fundraising Event

The disclosure requirements put in place under HLOGA do not address how they would apply to all fundraising practices. The FEC addressed much of that in its rules. One area covered in the rules and meriting additional discussion here is the case where an individual or entity hosts or co-hosts a fundraiser.

Must a campaign unilaterally disclose their involvement as hosts or co-hosts and attribute campaign contributions accordingly? The FEC decided that hosting an event in and of itself was not enough to merit disclosure and attribute funds. A blanket rule requiring this "could be confusing and could lead to the compelled disclosure of potentially misleading information." 11 C.F.R. 104.22(a)(6)(ii)(B). Instead, the FEC decided that the campaign's decision as to how to credit the receipt of funds would be a controlling factor in determining how to attribute the funds and disclose the host or co-host. Id. There would be no blanket rule or prorated amount that contributions would need to be ascribed to events with more than one host. "[R]eporting committees are in the best position to determine the amount of contributions raised by lobbyists/registrants and their PACs from cohosted fundraisers." Id.

Summary

The new bundling requirements put in place by Congress and the FEC are disclosure rules only. They do not affect annual contribution limits; rules requiring the formation of PACs or their solicitations. Nor do they reach beyond a limited population of those who lobby Congress or the Executive Branch, the entities that employ such individuals, and PACs. However, for those who enhance their practice or company, either by lobbying Congress or the Executive Branch or involving themselves in political fundraisers, an awareness of these requirements is important. A focus on the ethical considerations behind them is expected to continue in the 111th Congress and in the new administration as well.

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This article is presented for informational purposes only and is not intended to constitute legal advice.