Identification, Prevention, and Remedies for False Claims in Highway Improvement Contracting (2011)

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22 provide for the classification. The District Court con- cluded that the contractor was only negligent and that the evidence did not rise to the level of "deliberate ignorance" or "reckless disregard" and dismissed the litigation.134 Courts will review the factual circum- stance of each case and consider efforts to ensure com- pliance with contract provisions, available warning signs, and the frequency and recurrence of the con- duct.135 G. Effect of Government's Knowledge The Government's knowledge of the facts concern- ing alleged false claims can serve as evidence that defendant did not act "knowingly." This government knowledge defense is often asserted by defendants, and has been successful where there was strong evidence of Government knowledge and acceptance of the mis- conduct.136 Cases in which the contractor was following the Government's instructions often lead to the con- clusion that the contractor did not knowingly violate the FCA. In United States ex rel. Durcholz v. FKW Inc.,137 the Court of Appeals for the Seventh Circuit affirmed the lower court's dismissal of an FCA case. FKW, the contractor, was retained to remove debris from clogged drainage ponds, and followed the federal owner's explicit directions to submit invoices without line items. The court indicated that if the Government knows and approves of the particulars of a claim for payment before the claim is presented, the presenter cannot be said to have "knowingly" presented a false claim for payment. In such a case, the Government's knowledge effectively negates the falsity required under the FCA. Case law will be mixed, since Govern- ment knowledge must be evaluated based upon the entire circumstances of a particular case.138 H. Distinguishing Civil False Claims From Criminal Fraud Although civil false claims and criminal fraud appear to be similar, they are clearly distinct and somewhat different. False claim civil liability requires no showing of specific intent, while criminal liability requires proof of intent or proof that the defendant intentionally committed the misconduct. In addition, the burden of proof in civil false claims litigation is by "preponderance of the evidence,"139 while the burden in criminal prose- cutions is "beyond a reasonable doubt." Various federal criminal statutes that may be applicable to false claims matters will be addressed in our analysis of other po- 134 Id. at 638. 135 See SYLVIA, supra note 7, at 208–09. 136 See SYLVIA, supra note 7, at 203–06, for analysis of the case law on this issue in multiple federal circuits. 137 United States ex rel. Durcholz v. FKW Inc., 189 F.3d 542 (7th Cir. 1999). 138 Commercial Contractors, Inc. v. United States, 154 F.3d 1357 (Fed. Cir. 1998). 139 31 U.S.C.A. § 3731(d). tentially applicable statutes in Section XII of this di- gest. SECTION VI. EXAMPLES OF FALSE CLAIMS A. Liability for False Claims and False Records and Statements The liability provisions of the FCA as amended by FERA include seven liability provisions. Two of these, 31 U.S.C. § 3729(a)(1)(A) and (B), draw particular atten- tion. These impose liability upon a person who: 1. Knowingly presents or causes to be presented a false or fraudulent claim for payment or approval; or 2. Knowingly makes, or causes to be made or used or uses a false record or statement material to a false or fraudulent claim. These appear to be the most frequently invoked liability provisions. They involve conduct such as sub- mission of false invoices that overcharge the Gov- ernment for products or services. In the context of federal-aid transportation construction, such con- duct typically includes activities such as bid rigging, collusive bidding, kickbacks, and inflated invoices. These provisions impose liability not only on the person who presents the false claim, but also upon a person who causes another to present a false or fraudulent claim. Courts have considered both sec- tions together, since false claim misconduct fre- quently involves false claims supported by false re- cords and statements. B. Certifications A major source of potential false claim liability is contractor certifications during contract perform- ance that the contractors complied with contractual and legal obligations. A classic example of a contrac- tor certification, pursuant to state or federal law, is that it has paid its subcontractors from previous payment received. Illustrative of this is Lamb Engi- neering & Construction Inc. v. United States,140 a case in which the prime contractor certified that it had paid its subcontractor when in fact it had not. The court found false claim liability, and stated that the contractor "has a duty to examine its records to determine what amounts the government has paid or whether payments are actually owed to subcon- tractors…failure to make a minimal examination of records constitutes deliberate ignorance or reckless disregard."141 140 Lamb Eng’g & Constr. Inc. v. United States, 58 Fed. Cl. 106 (Ct. Cl. 2003). For a good general discussion of ex- amples of false claims, see Sink & Pages, supra note 130, at 15–45. 141 58 Fed. Cl. 110.

23 C. Davis-Bacon and Wage-Related Requirements Certifications involving wages and wage classifi- cations are another source of FCA claims. The Davis-Bacon Act requires all contractors on federally- aided construction projects to pay each employee the prevailing wages for employee classifications as estab- lished by the U.S. Department of Labor. Contractors' failures to pay prevailing wages and proper wage classifications are often sources of false claims. In United States ex rel. Plumber and Steamfitters Local Union No. 38 v. C. W. Roen Construction Co., the alle- gation involved underpayment of steamfitter wages, and the court stated that FCA liability may exist where a contractor falsely certifies payment of wages under Davis-Bacon.142 D. Certifications Involving Substandard Work and Materials A common and typical false claim allegation in- volves the contractor's failure to perform according to the terms of the contract requirements and specifi- cations. Today's modern contract provisions often re- quire the contractor to certify that the work com- plies with the contract documents. Often courts find false claim liability when contactors submit invoices including misrepresentations in their certifications. In United States ex rel. Fallon v. Accudyne Corp.,143 the court denied summary judgment on a case involv- ing allegations that the contractor failed to comply with the environmental provisions of the contract yet sought full payment without disclosing its failure to perform. The court stated that a contractor, seeking to receive payment as if it had fully performed an item of work but knowing that it had failed to perform a ma- terial requirement and not disclosing its nonperform- ance, has presented a false claim to the Government.144 E. Implied Certifications in Progress Payments In addition to liability arising from direct certifica- tions, liability may also be created from implied certi- fications. In Ab-Tech Construction Inc. v. United States, the Court of Federal Claims found FCA liabil- ity, and determined that the subcontractor failed to comply with implied certifications of continued compli- ance with the Small Business Administration (SBA) by submitting claims for progress payments.145 Ab-Tech was a minority-owned small construction company par- ticipating in SBA's Section 8(a) program. Its SBA con- tract provided that the contract could be terminated if the firm failed to get government approval of a man- 142 United States ex rel. Plumber and Steamfitters Local Union No. 38 v. C.W. Roen Constr. Co., 183 F.3d 1088 (9th Cir. 1999); cert. denied, 2000 U.S. Lexis 3762. 143 921 F. Supp. 611 (W.D. Wis. 1995). 144 Id. at 627. 145 Ab-Tech Constr. Inc. v. United States, 31 Fed Cl. 429 (1994). agement contract or other agreement with respect to contract work. Ab-Tech entered into an agreement with a company that was not minority-owned, granted that company a substantial role in manage- ment of the SBA contract without obtaining the re- quired SBA approval, and later lied about the existence of that agreement. Had the Government known about the agreement, the SBA would not have ap- proved it. The court determined that the payment vouchers submitted by Ab-Tech were false claims within the meaning of the statute and represented an implied certification by Ab-Tech of its continuing adherence to the requirements of the SBA Section 8(a) program. The court granted summary judgment on liability to the Government, holding that payment requests submitted by Ab-Tech during performance of the contract represented "implied certification by Ab- Tech of continuing adherence to the requirements" of the SBA program.146 A noteworthy recent decision from the California Court of Appeals was issued in late Feb- ruary 2010 in San Francisco Unified School District ex rel. Contreras v. Laidlaw Transit, lnc.,147 wherein the court noted the implied certification theory and ap- plied it to Laidlaw's request for contract payments, indicating that a vendor impliedly certifies compliance with the express contractual requirements when it bills a public agency for providing goods and services. The allegations involved Laidlaw's failure to meet pol- lution-control requirements, failure to repair buses, falsifying safety reports, and other breaches of con- tract, and submitting invoices with knowledge that it was in breach of the contract. Laidlaw's argument that there could be no false claim liability without a contractually-required certificate as a prerequisite for payment was rejected. The court determined that the qui tam relator stated a cause of action. The court held that a violation of the California FCA by a con- tractor can be established even though there is no false statement in the invoice itself and no explicit contrac- tual requirement to certify that the contractor is in compliance with contractual requirements. The court held that a request for payment contains an implied certification of compliance with all material elements of the contract.148 146 Id. at 434. 147 S.F. Unified Sch. Dist. ex rel. Contreras v. Laidlaw Transit, Inc., 182 Cal App. 4th 438; 106 Cal. Rptr. 34 (2010). 148 182 Cal. App. 4th at 448.

24 F. Inflated Invoices Contractors' submissions of inflated invoices that contain inflated quantities or overstated markups and that lack proper credits are frequent issues giving rise to liability in FCA litigation.149 G. Requests for Contract and Equitable Adjustments Requests for extra contract adjustments and addi- tional payments are often the source of false claims. A noteworthy example is the Daewoo litigation, previ- ously discussed in Section I of this digest, in which the contractor inflated his request for equitable adjust- ment and was found to have violated both the FCA and the Contract Disputes Act.150 Another important example is provided by Com- mercial General Contractors, Inc. v. United States,151 which involved a flood channel construction project for the U.S. Army Corps of Engineers. The Federal Cir- cuit upheld a lower court decision that the contractor had violated the FCA by knowingly submitting false claims when it knowingly failed to excavate in accor- dance with contract requirements, knowingly backfilled the channel using construction debris, and knowingly submitted claims for noncompliant work and for work in violation of quality control requirements. Another classic example of potential liability arising from a request for equitable adjustments occurred in Texas in United States ex rel. Wilkins v. North Ameri- can Construction Corporation.152 That case involved work on a groundwater treatment facility at Tinker Air Force Base in Oklahoma. The drilling subcontrac- tor's bidding package failed to include the more accu- rate government boring logs that reflected the actual site conditions. Having encountered difficulties, the prime contractor allegedly requested the subcontractor to redraft the request for equitable adjustment (REA) and to blame the government, alleging that it had withheld superior knowledge of subsurface conditions. The government alleged that the prime contractor told the subcontractor to remove critical references that blamed each other for the differing site conditions, which would have made the government less likely to approve the claims, and had urged the subcontractor to revise the REA to blame the government rather than the prime contractor for any misinformation as to site conditions. The prime and subcontractor later certified that the REA was made in good faith, that supporting data were accurate, and that the amount requested accurately reflected amounts that the prime and sub- contractor believed the government to be liable. The 149 For discussion of allegation of inflated invoices, see United States v. Sequel Contractors, Inc., 402 F. Supp. 2d 1142, 1152–53 (C.D. Cal. 2005). 150 Daewoo Eng’g and Constr. Co. v. United States, 73 Fed. Cl. 547, 596 (2006). 151 154 F.3d 1357 (Fed. Cir. 1998). 152 173 F. Supp. 2d 601 (S.D. Tex. 2001 ). REA was certified by both the prime contractor and subcontractor. The ensuing FCA litigation survived motions to dismiss, and was later settled. Contractors, in their requests for contract adjust- ments, often seek to recover delayed or extended equipment costs, using rental rates that may vary from the actual costs reflected in company accounting records. This may lead to potential FCA liability. In addition, contractors' calculations for overhead delay damages often fail to provide proper credit for overhead compensation paid during a delay period. This may also lead to FCA liability. Additionally, "horse trading" may be grounds for false claims liability. Examples would include contractors seeking payment for extra com- pensation using inapplicable contract payment items,153 and contractors submitting inflated and base- less claims merely as a negotiating tactic as discussed in the Daewoo case.154 H. Adoption of Unreasonable Interpretations False claim liability may arise from a contractor's adoption of unreasonable interpretations of contract requirements. In Commercial General lnc. v. United States, the court rejected the contractor's interpreta- tion of the contract because it contradicted the express terms of the contract.155 The contractor was seeking ad- ditional backfill and excavation quantities. The court held that the contractor's interpretation was untenable in light of the unambiguous terms of the contract.156 The court noted that when a contractor adopts an im- plausible contract interpretation in the face of an un- ambiguous contract term or other evidence, the contrac- tor may be liable under the FCA. 157 I. D/M/WBE Issues Representations made by contractors that they have complied with disadvantaged, minority, or women's business enterprise (D/M/WBE) requirements have been the subject of several false claim cases. D/M/WBE issues have also been the subject of significant federal criminal prosecutions and convictions of prime contrac- tors on federal-aid state transportation construction projects.158 The allegations in such cases typically assert that work approved to be done by a D/M/WBE subcon- tractor was actually performed by the prime contractor or by a non-D/M/WBE subcontractor, that the approved 153 Interview with Vincent DiCianni, Alliance Monitors, Boston, Mass. (Feb. 24, 2010). 154 Daewoo Eng’g v. United States, 73 Fed. Cl. 547. 155 Commercial Gen. Inv. v. United States, 154 F.3d 1357 (Fed. Cir. 1998). 156 154 F.3d at 1361–62. 157 Id at 1366. 158 See, e.g., Press Release, New York City Department of lnvestigation, New York Construction Contractors Plead Guilty to Mob Payoffs and Fraud Schemes Totaling 40 Mil- lion Dollars (Nov. 14, 2001), available online at http://www.nyc.gov/html/doi/downloads/pdf/prl1140l.pdf (last accessed June 10, 2010).

25 D/M/WBE subcontractor did not serve a commercially useful function on the project, and that the pur- ported D/M/WBE subcontractor was merely a false "front" company. J. Fraud to Obtain Contracts: Bid-Rigging, Collusive Bidding, and Kickbacks Classic bid-rigging schemes are fertile ground for false claim liability. Bid-rigging schemes, where con- tractors collude and this relationship results in higher total contract prices for the Government, are some- times referred to as liability for fraudulent induce- ment. Criminal convictions often result, and can serve to estop the bid-rigging defendant collaterally from contesting false claim liability. Fraudulent efforts to obtain contracts can involve misrepresentations of costs, personnel, and other contract elements. Bid-rigging that results in a contract award is a fraudulent course of conduct that gives rise to FCA li- ability. In U.S. v. ex rel. Marcus v. Hess, 159 the U.S. Supreme Court addressed false claims issues involving collusive bidding for federally-funded projects and found three electrical contractors liable under the FCA for claims submitted under a Government con- tract obtained through collusive bidding. The court stated that the fraud did not end with the execution of the contract but tainted every "swollen" contract payment made by the Government.160 Further, in United States ex rel. Bettis v. Oderbrecht Contractors of California, the Court of Appeals of the District of Colum- bia reviewed the fraud-in-inducement theory under the FCA.161 The contractor, Oderbrecht, submitted a low bid for construction of the Seven Oaks Dam and appur- tances in San Bernardino, California. During construc- tion, the contract was adjusted through a REA, and Oderbrecht received an additional $100 million. A relator commenced qui tam litigation, alleging that Oderbrecht had violated the FCA by fraudulently in- ducing the U.S. Army Corps of Engineers to award the contract by submitting an intentionally underval- ued bid, later seeking false modifications of prices once the contract was awarded. The court affirmed the lower court's dismissal of the litigation, since the evi- dence presented by the relator did not permit the conclusion that Oderbrecht had fraudulently induced the Corps to award the contract. Similarly, kickbacks also can lead to false claim liabil- ity. In United States v. Safe Environment Corp.,162 an Am- trak project manger instructed a contractor to inflate its proposed bid with a "consultant fee." After the con- tract was awarded, the "consultant fee" was later in- voiced to Amtrak. After criminal conviction, the con- tractor was also found liable under the FCA for knowingly submitting a false claim. Note that a federal 159 317 U.S. 537 (1943). 160 I d. at 543–44. 161 United States ex rel. Bettis v. Oderbrecht Contractors of Cal., 393 F.3d 1321 (D.C. Cir. 2005). 162 2002 U.S. Dist. Lexis 8421 (N.D. Ill.). criminal statute specifically addressing kickbacks is dis- cussed in Section XII of this digest. K. Buy America FCA violations have included false certifications that the contractor had complied with the Buy America provisions in the contract, when in fact the materials were purchased elsewhere. In United States v. Rule Industries,163 the Federal Government recovered for false claim liability from a contractor who falsely certi- fied compliance with the Buy America provisions when the contract pay items were manufactured in Sweden and Japan. In Rule, the court affirmed the lower court’s jury determination that the defendant knowingly made these false claims on each of 302 invoices and assessed a penalty of $604,000, a $2,000 penalty for each invoice as provided in the FCA. 164 L. Subcontractor Claims Subcontractor false claims to prime contractors are also actionable under the provisions of the FCA. As discussed in Section II of this digest, this is one of the areas in which the FERA amendments to the FCA have overturned judicial interpretations of the prior version of the FCA and have strengthened FCA protections against false claims and fraud. Many public contracts contain "pass through" clauses requiring the general contractor to review all subcontractor claims or "sponsor" those claims prior to their submittal to the public owner. A false or fraudu- lent claim by a subcontractor may subject both the contractor and subcontractor to FCA liability in in- stances where the contractor knows, or should have known, of the falsity of the subcontractor's claim. Merely rubber-stamping a subcontractor's claim and forwarding it to the owner may constitute acting in a reckless manner. The general contractor cannot act as an "ostrich in the sand" when it comes to subcontrac- tors' claims. One example is provided by the Wilkins case dis- cussed above, in which the prime contractor and sub- contractor were alleged to have false claims liability occasioned by their submission of a request for equi- table adjustment.165 M. Other False Claims Act Liability Provisions While the provisions of 31 U.S.C. § 3729(a)(1)(A) and (B) draw particular attention, the remaining five liability provisions of 31 U.S.C. § 3729(a)(1)(C) through (G) also deserve attention, as they too may give rise to the imposition of liability. These additional provisions impose FCA liability upon persons who engage in the following categories of conduct: 163 878 F.2d 535 (1st Cir. 1989). 164 878 F.2d at 538. 165 United States ex rel. Wilkins v. N. Am. Constr. Corp. 173 F. Supp. 2d 601.