Civil False Claims Act Liability in Applications for Payment

Construction and Procurement Law News, Q1 2015

Firm Alert

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A recent opinion from the Fourth Circuit Court of Appeals, the federal appeals court covering Virginia, Maryland, West Virginia, North Carolina, and South Carolina, serves as a reminder of the breadth of the civil False Claims Act (“FCA”) when applied to contractors working on projects funded by the federal government. Badr v. Triple Canopy also reminds contractors working on federally-funded jobs to maintain strong compliance programs and internal controls designed to avoid the types of contractual violations that can lead to liability under the FCA. Otherwise, contractors could be looking at civil FCA violations, which carry with them the potential for treble damages and up to $11,000 in penalties per false claim or false statement.

In Badr, the Fourth Circuit joined other federal courts across the country in holding that a government contractor violates the FCA if it submits a request for payment on a federally-funded contract and, in the process, withholds information about the contractor’s noncompliance with a “material” contractual requirement. Under this “implied certification” theory of claim falsity, there is no requirement that the contractor submit a false certification of compliance with the contractual term at issue, or otherwise include something false within its payment application. So long as the contractual provision that was violated by the contractor was “material,” and the contractor knew or recklessly disregarded the fact that it was submitting its payment application without disclosing the violation of a material contract term, the contractor can be held liable for damages and penalties under the FCA.

According to the Fourth Circuit, a material contract term is one where a contractor’s compliance or noncompliance with the term has “a natural tendency to influence, or [is] capable of influencing, the Government’s decision to pay.” The contract itself does not have to expressly state that a provision is material or that payment is conditioned upon compliance with the provision for the contract term to be “material.”

The Badr case involved a contract to provide security guards at an airbase in Iraq. The contractor allegedly hired guards who did not meet a marksmanship requirement contained in the contract, and allegedly created false shooting scorecards to disguise the deficiency. The Fourth Circuit held that the marksmanship requirement was material because, in the court’s words, “common sense strongly suggests that the Government’s decision to pay a contractor for providing base security in an active combat zone would be influenced by knowledge that the guards could not, for lack of a better term, shoot straight.” The court also noted that the contractor’s alleged efforts to cover up the deficiency also suggested materiality.

The contractor in Badr argued that the Government failed to properly allege that the falsified scorecards were material because there was no allegation that the government official in charge of payment actually reviewed the scorecards. The Fourth Circuit rejected this argument, stating “the FCA reaches government contractors who employ false records that are capable of influencing a decision, not simply those who create records that actually do influence the decision.”

The Fourth Circuit’s holdings in Badr do not present new theories of FCA liability. Instead, the Fourth Circuit is following trends set by other federal courts across the country. Contractors on federally-funded projects must train employees to spot deficiencies in contract performance and report them to appropriate personnel within the company so that a decision can be made as to how to address those deficiencies before the contractor submits its next payment application.