Congress Amends False Claims Act

Background

On May 18, 2009, Congress passed the Fraud Enforcement and Recovery Act of 2009 ("FERA"), which amends the civil False Claims Act ("FCA"). Efforts to amend the FCA, which was last rewritten in 1986, have been ongoing for several years. FERA was introduced as S. 386 by Senators Leahy, Grassley, and Kaufman on February 5, 2009. President Obama is expected to sign FERA without delay.

FERA has two primary purposes. First, Congress sought to amend various criminal provisions to make them applicable to Troubled Asset Relief Program ("TARP") initiatives, particularly those involving mortgage modification and refinancing. Second, according to the Senate Judiciary Committee, "[t]he effectiveness of the False Claims Act has recently been undermined by court decisions which limit the scope of the law and, in some cases, allow subcontractors paid with Government money to escape responsibility for proven frauds. The False Claims Act must be corrected and clarified in order to protect from fraud the Federal assistance and relief funds expended in response to our current economic crisis." Sen. Rep. No. 110-10, at 4 (Mar. 23, 2009).

According to committee reports, floor statements, and testimony, Congress was particularly concerned about three decisions: United States ex rel. Totten, Allison Engine, and Custer Battles. For more information about these decisions, please see Crowell & Moring's prior bullet points [Court Applies Totten Reasoning to Subcontractor Liability Under FCA, False Claims Act - Supreme Court Will Review Allison, and Fourth Circuit Rules In Custer Battles].

Key Changes to Liability Provisions

There are five key changes to the liability provisions of the FCA.

1. Congress modified the intent requirement in § 3729(a)(2) by deleting "to get" and "paid or approved by the Government." Under the 1986 version of the FCA, liability attaches if a person "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." § 3729(a)(2). Under the amended language, liability attaches if a person "Knowingly makes, uses, or causes to be made or used, a false record or statement material to a false or fraudulent claim." The purpose of this change is to clarify that a person can be liable under the FCA even in the absence of specific intent to get paid by the federal government. For example, a subcontractor can be liable based upon submission of a false claim to a prime contractor in the context of a government contract, even if there is no intent to get paid directly or indirectly by the federal government. Congress provided the retroactive application of this section to all claims pending as of June 7, 2008, which is the date the Supreme Court decided Allison Engine. The retroactivity provision raises serious constitutional issues that will undoubtedly be raised in litigation.
2. Congress changed the definition of "claim" to make clear that the government need not have title to the money or property being sought. The revised language includes funds administered by the government or provided to further a government interest. As a result of comments by the Department of Justice, Congress limited this expansive definition by excluding demands for money or property the government has provided to federal employees as compensation or subsidy.
3. Congress has included a statutory definition of "materiality" - "having a natural tendency to influence, or be capable of influencing, the payment or receipt of money or property" - that is generally consistent with prior judicial interpretations.
4. Congress expanded liability for reverse false claims to include the knowing retention of overpayments, even if those overpayments were innocently received. In addition, Congress has slightly expanded the definition of "obligation" as follows: "the term 'obligation' means an established duty, whether or not fixed, arising from an express or implied contractual, grantor-grantee, or licensor-licensee relationship, from a fee-based or similar relationship, from statute or regulation, or from the retention of any overpayment."
5. Congress expanded conspiracy liability to cover conspiracy relating to any provision of the FCA, including reverse false claims.

Other Provisions

In addition to the liability changes discussed above, there are four principal amendments that relate to other aspects of the FCA.

1. When the government intervenes in a qui tam suit and files a new complaint that may include new allegations or claims, the entire complaint relates back to the date of the relator's complaint.
2. The legislation allows the Attorney General to share information obtained under a Civil Investigative Demand with relators. In addition, the bill authorizes the Attorney General to appoint a designee to approve a Civil Investigative Demand. This change will allow government-developed information to be used by relators to bolster their complaints, and may thwart the legitimate gatekeeping protections served by Rule 9(b).
3. The bill permits the government or a relator to share information with state and local governments with responsibility for investigating such issues.
4. The legislation expands liability for retaliatory acts by removing the requirement that the conduct be taken by an employer. Under the new language, covered conduct extends to action taken against a contractor or agent.

General Comments

The stated purpose of legislation is purportedly to "correct" and "clarify" court decisions that have limited the scope and application of the FCA in ways that are contrary to congressional intent. The amendments, however, are broader and more sweeping than mere corrections or clarifications and extend beyond fraud in connection with relief programs.

These changes to the FCA must be considered in light of other reforms: FAR mandatory disclosure provisions; increased resources for enforcement, investigation, and litigation; whistleblower protection; and heightened authority of Inspectors General to investigate use of Recovery Act funds. The interplay of these different reforms may well have consequences that Congress did not intend.

Moreover, the amended language raises several important questions that will have to be resolved by the courts. For example, relators will undoubtedly argue that the addition of "materiality" to the "false statement" and "reverse false claims" provisions means that materiality is no longer required to establish liability under the FCA's "false claims" or other liability provisions.