The False Claims Act, without going into all of its intricacies, allows a private person (referred to as a relator) to file an action for the benefit of the government against a person/entity that violated the Act and submitted a false claim or false statement to the government. This action is known as a qui tam action when the private person–relator–files an action for the benefit of the government. When this occurs, the qui tam action is initially filed under seal and the government has the opportunity to determine if it wants to intervene and take over the prosecution of the action. A violation of the False Claims Act can subject the offending party to a civil penalty plus three times the amount of the government’s damages. See 31 USCA s. 3279 et seq.
The benefit to the relator is that it is entitled to receive a percentage range of the amount the government recovers in the action based on whether the government took over the prosecution of the action or elected not to intervene. The relator is also generally entitled to its attorneys’ fees and costs.
Thee Middle District of Florida case, Prime v. Post, Buckley, Schuh, & Jernigan, Inc., 2013 WL 4506357 (M.D.Fla. 2013), is a recent case discussing the False Claims Act. In this case, the United States Army Corps of Engineers (“USACOE”) entered into a fixed-price indefinite delivery/indefinite quantity architect-engineering contract with a joint venture design professional firm (the “Firm”). The USACOE entered into the contract for the Firm to provide architectural and engineering services relating to everglades restoration work. The contract between the USACOE and the Firm included specific daily labor rates that the Firm was to charge for various personnel / labor (i.e., project manager, engineering technician, etc). The USACOE would give the Firm specific design professional tasks which would be negotiated into fixed price task orders (i.e, the specific task would be performed for a lump sum amount). The fixed price for the tasks would be determined by the type of labor used to complete the task times the number of man-hours. The price was then negotiated which included a component for profit for the Firm. Upon the completion of a task, the Firm would send an invoice to the USACOE for payment which was never questioned by the USACOE.
However, because the tasks were negotiated on a lump sum basis, USACOE representatives acknowledged that if it cost more for the Firm to complete the task, then the Firm was responsible for the overrun. Conversely, if the Firm could perform the work cost effectively by using lower cost labor to complete the tasks, then the Firm would keep the profit. This is the essence of a lump sum contract with the objective being to maximize the profitability by performing the work more cost effectively then negotiated. In other words, the actual costs to perform the work become irrelevant because the parties already negotiated a lump sum amount.
The plaintiff in this action was a former high-ranking employee of one of the design professional entities that formed the Firm. He was heavily involved in the negotiation of the contract and served on the management committee of the Firm for performing the work. At some point early on, plaintiff learned that the Firm’s profits were over 30% (and he felt that the profits should have been in the range of 8-10%). He learned the profits were greater because the Firm was using lower cost labor than the rates set forth in the contract. Yet, plaintiff, nearly seven years after the contract was executed, decided to discuss this issue with his boss. This issue was internally looked into and the Firm determined that it did nothing wrong. Shortly thereafter, plaintiff’s position with his design professional firm changed (a demotion) and his bonus and salary were reduced. Plaintiff was ultimately laid off due to lack of work.
Following plaintiff’s lay-off, he (as the relator) initiated this qui tam action under the False Claims Act for the benefit of the government. He argued that the Firm violated the Act by falsely impliedly certifying in in its invoices to the government by using cheaper labor and not disclosing true profits. (He also argued that he was terminated in violation of the Act although this portion of the case will not be discussed in detail other than that the plaintiff failed to prove he was retaliated against or terminated in violation of the whistleblower portion of the Act). The Firm argued that the task orders were fixed price task orders and they were entitled to keep any profit no different then they’d be liable for eating any losses.
To prove a claim under the False Claims Act, the plaintiff must establish the defendant made a false claim or statement. Prime, 2013 WL at *7. The Middle District explained:
“There are two categories of false claims under the FCA: a factually false claim and a legally false claim. A claim is factually false when the claimant misrepresents what goods or services that it provided to the Government and a claim is legally false when the claimant knowingly falsely certifies that it has complied with a statute or regulation the compliance with which is a condition for Government payment.
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There is a further division of categories of claims as the courts have recognized that there are two types of false certifications, express and implied. Under the ‘express false certification’ theory, an entity is liable under the FCA [False Claims Act] for falsely certifying that it is in compliance with regulations which are prerequisites to Government payment in connection with the claim for payment of federal funds. There is a more expansive version of the express false certification theory called ‘implied false certification’ liability which attaches when a claimant seeks and makes a claim for payment from the Government without disclosing that it violated regulations that affected its eligibility for payment. Thus, an implied false certification theory of liability is premised on the notion that the act of submitting a claim for reimbursement itself implies compliance with governing federal rules that are a precondition to payment.”
Prime, 2013 WL at *7-8 quoting U.S. ex rel. Wilkins v. United Health Group, Inc., 659 F.3d 295, 305 (3d Cir. 2011).
The Middle District held that the plaintiff in this case failed to prove the “false” requirement and granted summary judgment for the Firm because the plaintiff failed to prove how the Firm violated the contract or federal law when the task orders were for fixed prices. The Court noted: “Here, the man-day labor rates in the Contract were set at fixed rates. Therefore, the Government knew, or should have known, that Defendants would reap the benefits of any cost savings, just as they would suffer the consequences of any cost increases.”
Please contact David Adelstein at dadelstein@gmail.com or (954) 361-4720 if you have questions or would like more information regarding this article. You can follow David Adelstein on Twitter @DavidAdelstein1.