This week, we are pleased to have a guest post from Kevin Daly.  Attorney Daly is a member of the firm’s Manufacturing Industry Group and also its Trade Compliance Team. 

The False Claims Act (FCA) is a major civil enforcement tool used by the federal government to redress fraud causing monetary loss to the government.  In the 2016 fiscal year, the federal government recovered over $4.7 billion in FCA judgments and settlements.  While in the manufacturing sector it most frequently affects government contractors, its reach can be broader and it is a statute that all manufacturers should be aware of.

WHAT IS IT?

The FCA is a civil statute that prohibits presenting false or fraudulent claims for payment to the federal government, or causing the presentment of such claims.  The law also prohibits making, using or causing to be made or used a false statement to conceal or avoid paying an obligation to the government.

HOW IS IT ENFORCED?

The FCA permits private citizens with knowledge of alleged FCA violations to enforce the statute by suing alleged wrongdoers on the government’s behalf and sharing in the government’s monetary recovery if successful.  The majority of FCA lawsuits are brought by these private “relators”; the government may bring FCA lawsuits itself but such direct enforcement actions are relatively rare.  The FCA’s “qui tam” provision authorizing suits by private relators is a potentially lucrative mechanism for whistleblowers (who could be current or former employees, customers or others in a business relationship, or competitors) who believe that a company has defrauded the government.  Companies or individuals found to have violated the FCA are liable for treble damages plus civil penalties of $10,957 to $21,916 per violation.  (These penalties are adjusted annually to account for inflation).

WHO DOES IT APPLY TO?

The potential for FCA liability is present for manufacturers that sell directly to the federal government, and, in some instances, even to manufacturers with no government contracts.

The FCA was first enacted during the Civil War to provide a remedy against suppliers who defrauded the government in selling supplies to the Union Army.  The FCA is still used to address such “procurement fraud” cases today.  These cases often involve overcharging the government by, for example, charging for substandard goods, providing goods less expensive than what was ordered and billed for, overcharging for a product, or billing for a higher quantity of good than what was provided.  Additionally, the FCA is used to enforce compliance with contractual provisions and statutory and regulatory requirements governing government contractors.  These cases rely on the theory that, by submitting a claim for payment, a contractor expressly or impliedly represents that it is in compliance with the applicable requirements.  Most courts have permitted the government to bring FCA cases on this theory.  For these reasons, FCA risk is particularly present in manufacturing sectors that rely on purchases by the federal government, such as military equipment.

DOES IT APPLY TO NON-GOVERNMENT CONTRACTORS?

Even manufacturers that do not do business with the federal government directly can face FCA liability if their downstream customers bill the federal government.  For example, the single largest sector for FCA enforcement is the healthcare industry.  The government has used the FCA to enforce regulatory requirements applicable to pharmaceutical and medical device manufacturers, such as FDA marketing regulations and the anti-kickback statute.  These manufacturers can face FCA liability, even though in most cases they do not bill government health care programs directly, on the theory that the manufacturer has caused a pharmacy, hospital, or other provider to submit a false claim when the manufacturer violates these statutes and regulations.

Additionally, even companies with no relationship to the federal government can face FCA liability in certain situations.  Recently, some relators have brought FCA lawsuits against companies that have allegedly made false statements in customs paperwork.  These cases allege that, because the FCA prohibits making false statements to avoid paying an obligation to the government, false statements that reduce the import duty owed (e.g. by misstating the country of origin of the goods, the value of the goods, or the nature of the goods) violate the FCA.  Manufacturers that produce their goods overseas or import materials from overseas could face lawsuits of this nature.

The FCA is a technical, rapidly evolving area of the law.  It carries the potential to affect manufacturers a variety of sectors, in some instances even without a direct relationship to the federal government.