Supreme Court Clarifies the Extent to Which the False Claims Act Applies

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July 03, 2008

On June 9, 2008, the U.S. Supreme Court decided the case of Allison Engine Co., Inc., v. U.S. Allison Engine was a test of the False Claims Act, which rewards whistleblowers who report when the U.S. government is being defrauded by those who do business with it. At issue was the question of whether the law covers only those cases in which a fraudulent bill is presented directly to the government or whether it could also cover situations in which government funds may be misspent, but the actual fraudulent bill is presented to a company or other institution that receives federal funds and not directly to the government.

In the case two workers were involved in the manufacture of electrical supplies for the Navy's billion-dollar Arleigh Burke-class Guided Missile Destroyers. The men worked for one of several subcontractors who collaborated on the design and building of generator sets used to power the destroyers. They alleged in their qui tam suits that the companies used unqualified workers to build the gen-sets, installed leaky gearboxes in the systems and used defective temperature gauges.

After a five-week trial, the district court granted judgment as a matter of law for the companies. The court concluded that the FCA requires that defendants must have presented a fraudulent claim to the government. The district court ruled that the presentment requirement had not been met because the subcontractors submitted their invoices to the prime contractor.

The 6th Circuit reversed that decision. The court held that the FCA was meant to be liberally construed in order to discourage double-dealing against the government. The FCA imposed liability on any person who "knowingly makes, uses, or causes to be made or used, a false record or statement to get a false or fraudulent claim paid or approved by the government." The 6th Circuit held that this requirement was satisfied when the subcontractors prepared invoices that resulted in payments from the prime contractors out of monies received by the Navy.

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In reaching this conclusion, the 6th Circuit distinguished a D.C. Circuit case, Totten v. Bombardier Corp., 380 F.3d 488 (D.C. Cir. 2004). In Totten, the court refused to sign off on a FCA claim where the defendants had prepared false documents for payment by Amtrak. The court held that even though Amtrak received government funds, it was an independent entity authorized to pay its own claims without gapproval. Therefore, the court held that even though the defendants ultimately received government money, their claims were not subject to the FCA.

The Supreme Court disagreed with the 6th Circuit on several grounds. In an unanimous opinion written by Justice Alito, the Supreme Court held that it was insufficient for a plaintiff asserting an FCA §3729(a)(2) claim to show merely that the false statement's use resulted in payment or approval of the claim or that government money was used to pay the false or fraudulent claim. Instead, such a plaintiff must prove that the defendant intended that the false statement be material to the Government's decision to pay or approve the false claim. The Supreme Court faulted the 6th Circuit's interpretation of §3729(a)(2) because it impermissibly deviated from the statute's language, which requires the defendant to make a false statement "to get" a false or fraudulent claim "paid or approved by the Government." The court noted that because "to get" denotes a purpose, a person must have the purpose of getting a false or fraudulent claim "paid or approved by the Government" in order to be liable. Moreover, the court pointed out that getting such a claim 
"paid . . . by the Government" is not the same as getting it paid using "government funds." Under §3729(a)(2), a defendant must intend for the government itself to pay the claim. Justice Alito wrote that "[e]liminating this element of intent would expand the FCA well beyond its intended role of combating 'fraud against the Government.'"

The court rejected as unpersuasive the Government's contention that "paid . . . by the Government" does not have to mean literal Government payment. The court pointed to the clear language of the FCA §3729(c) that would allow a request to be a "claim" even if it is not made directly to the government, but it further pointed out that under §3729(a)(2) it is necessary that the defendant intend that a claim be "paid by the Government," not by another entity.

The court also discussed the proof required in order to make an FCA claim under §3729(a)(2). That section requires proof that a defendant's false statement was submitted to the government. The court noted that because the section requires only that the defendant make the false statement for the purpose of getting "a false or fraudulent claim paid or approved by the Government," a subcontractor violates §3729(a)(2) if it submits a false statement to the prime contractor intending for that contractor to use the statement to get the Government to pay its claim. If a subcontractor makes a false statement to a private entity, however, but does not intend for the Government to rely on the statement as a condition of payment, the direct link between the statement and the government's decision to pay or approve a false claim is too attenuated to establish liability. Thus, the court's reading of this section of the FCA gives effect to Congress' efforts to protect the government from loss due to fraud and also ensures that "a defendant is not answerable for anything beyond the natural, ordinary, and reasonable consequences of his conduct," citing Anza v. Ideal Steel Supply Corp., 547 U.S. 451, 470.

The court further held that under §3729(a)(3) of the FCA it is not enough for a plaintiff to show that the alleged conspirators agreed upon a fraud scheme that had the effect of causing a private entity to make payments using money obtained from the government. Instead, it must be shown that they intended "to defraud the government." Where the conspirators' alleged conduct involved the making of a false statement, it need not be shown that they intended the statement to be presented directly to the government, but it must be established that they agreed that the statement would have a material effect on the Government's decision to pay the false or fraudulent claim.

For Further Information
If you have any questions about this Alert or would like more information, please contact Tamara M. McNulty, any other member of the Construction Group or the attorney in the firm with whom you are regularly in contact.

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