PROCUREMENT FRAUD UPDATE

The Federal Acquisition Regulation ("FAR”)now requires nearly all companies doing business with the federal government to implement corporate ethics and compliance programs and further mandates that companies must disclose “credible evidence” of violations of (i) criminal law; or (ii) the False Claims Act related to a government contract. In order to assist clients and friends with their new compliance efforts, we are providing periodic updates on potentially relevant procurement fraud developments and cases.

Government Accountability Office: In January 2009, the GAO issued an update to its watch list of high risk programs. GAO noted “areas are identified, in some cases, as high risk due to their greater vulnerabilities to fraud, waste, abuse and mismanagement.” Although not all programs are designated by GAO as high risk because of their susceptibility to procurement fraud, companies participating in an identified program are certain to be subjected to greater scrutiny. For a list of the GAO's 2009 high risk programs, click here.

Department of Treasury: On January 21, 2009, the Treasury Department issued interim regulations effective immediately providing guidance on conflicts of interest under the Emergency Economic Stabilization Act of 2008 (“EESA”). 74 Fed. Reg 3431 (Jan. 21, 2009). In general, contracts awarded under the EESA, like Treasury depositary agreements, are not governed by the FAR. The new rule applies to “retained entities” broadly defined as any person or entity seeking or having an arrangement with Treasury, including subcontractors and consultants. In addition to providing an organizational conflict of interest prohibition—broader than FAR 9.5—the interim regulation also imposes a mandatory disclosure requirement identical to the new FAR obligation to disclose violations of criminal conduct and False Claims Act violations.

There continues to be a steady stream of False Claims Act decisions from courts around the country. As summarized below, courts continue to have varying views on several issues including:

• What is necessary to trigger jurisdictional bars for relators;
• The pleading requirements for satisfying the particularity requirements under Rule 9(b); and,
• The interplay between criminal and civil fraud actions.
  

United States ex rel. Poteet v. Medtronic, Inc., ___ F.3d ____, 2009 WL 77968 (6th Cir. Jan. 14, 2009) (slip op.). In this case, the Sixth Circuit took the opportunity to discuss the interplay between the public disclosure and the first-to-file provisions in the FCA. Prior to the relator filing this case, one former employee filed a wrongful termination case in California state court alleging he was discharged for refusing to comply with his supervisor’s direction to pay illegal kickbacks to doctors. Another former employee filed a qui tam suit alleging that Medtronic’s kickback scheme violated the FCA. The Sixth Circuit found that the California wrongful discharge case triggered the FCA’s public disclosure bar. Even though the relator offered new details about the alleged kickback scheme and identified different doctors, because the allegations “bear a substantial likeness,” the FCA case was “based upon” the wrongful discharge claim. The Sixth Circuit went on to analyze the first-to-file exception to the FCA. The court noted that the earlier-filed qui tam action, while not identical, was substantially similar to the current complaint. Nonetheless, the Sixth Circuit found that the earlier-filed qui tam case did not satisfy Rule 9(b), and therefore, the first-to-file rule was not implicated because the first-to-file bar only precludes “subsequent complaints filed after a complaint that fulfills the jurisdictional perquisites of §3730(e)(4).”

United States ex rel. Carter v. Halliburton Co., 2009 WL 90134 (E.D.Va. Jan. 13, 2009) (slip op.). The relator alleged that Halliburton failed to conduct water testing at military camps in Iraq. The court granted Halliburton’s motion to dismiss noting that the relator only alleged that Halliburton failed to comply with the water testing requirements but billed the Government under the contract as though it had. The court found the relator’s inability to identify the time, place or content of any false claims or false statements was insufficient to satisfy Rule 9(b).

In re McFarland, ___ B.R. ____, 2009 WL 111463 (Bankr. M.D. Fla. Jan. 14, 2009) (slip op.). The issue in this case was whether civil False Claims Act damages are dischargeable in bankruptcy. In this case, the debtors were husband and wife owners of a construction firm. In 2005, the debtors filed for bankruptcy. After obtaining a discharge in bankruptcy court, the husband was indicted under the criminal False Claims Act for mischarging bond premiums on certain government contracts. He was sentenced to pay $435,297.24 in restitution, which the Government agreed was the Government’s actual damages, and assessed a $5,000 fine. Shortly after sentencing, the Government asserted the debtors were liable under the civil False Claims Act based on the same conduct in the criminal action and sought $7,284,497.62 - before treble damages. The debtors sought a declaratory judgment that the claim was not within an exception to the bankruptcy code, and therefore, discharged. The bankruptcy court found that the treble damages imposed under the civil FCA were penal in nature, rather than compensatory, and therefore, not dischargeable under the bankruptcy code. The court further held that merely because the civil FCA was penal in nature did not automatically implicate the Double Jeopardy clause. Accordingly, the court found that the civil FCA claim against the husband was not discharged. Inexplicably, the court went on the hold that there was no evidence in the record to find that the wife, who was not charged criminally, had presented a false or fraudulent claim to the Government, and therefore, the court concluded that any claim against her under the civil FCA was discharged.

United States ex rel. Crenshaw v. Degayner, 2009 WL 111673 (M.D. Fla. Jan. 15, 2009) (slip op.). The court taxed costs—but not attorneys’ fees—to the plaintiff under 28 U.S.C. §1920 and Fed. R. Civ. P 54(d)(1) after the court granted summary judgment to the defendant. The court rejected the relator’s argument that §3730(d)(4) allowing a court to award attorneys fees and costs to a prevailing defendant if the court finds the action frivolous or vexatious, required such a finding before costs could be taxed in an FCA case. Relying on precedent from other circuits, the court found that the FCA did not displace the court’s ability to award costs under Rule 54.

United States ex rel. Lynn v. Christus Health, 2009 WL 151590 (S.D. Tex. Jan. 22, 2009) (slip op.). The relator alleged that the defendant-health system’s below-market leases for offices violated the Anti-Kickback and Stark Acts. Earlier, another tenant in one of the defendant’s buildings had filed a state-court action claiming to be wrongfully displaced, noting in one paragraph of the complaint that she was ousted for a tenant paying less rent in violation of the Stark Act. The court concluded that the single paragraph in the earlier-filed case mentioning the Stark Act was insufficient to trigger the jurisdictional bar. Nonetheless, the court found that the complaint should be dismissed for failing to meet Rule 9(b)’s pleading requirements. Contrary to many other cases, the court found that sufficiently pleading Stark and Anti-Kickback violations was insufficient to establish an FCA violation. Likewise, the court found the defendant’s certification that it complied with all laws and regulations insufficient to support a false certification theory.

United States v. Dolphin Mortgage Corp., 2009 WL 153190 (N.D. Ill Jan. 22, 2009) (slip op.). This case addressed the preclusive effect of prior guilty pleas in a subsequent civil FCA action. Two individuals pled guilty to mail fraud related to falsifying HUD loan applications. The Government subsequently sued their employer under the FCA. The Government first argued that under §3731(d) the pleas should preclude the employer from denying liability. The court rejected this argument concluding that the term “defendant” in the FCA is limited to the defendant in the underlying criminal action. Nonetheless, after analyzing the employees’ actions and authority within the organization, the court found that the employer was liable for their actions under a respondeat superior theory.