Burden of proof on government in subcontractor fraud

The government will not be able to collect damages from government subcontractors under the False Claims Act unless it can prove the subcontractor intended to defraud the government, the Supreme Court ruled June 9.

In a unanimous decision written by Justice Samuel Alito, the court ruled that the government cannot show simply that a subcontractor made a false statement and was paid with federal dollars. Instead, a plaintiff pursuing a False Claims Act case “must prove that the defendant intended that the false record or statement be material to the government’s decision to pay or approve the false claim,” Alito wrote.

Joel Hesch, a law professor at Liberty University and former Justice Department fraud prosecutor, said the ruling largely restates the process the Justice Department already uses when pursuing false claims cases against subcontractors. Also, it validates the notion that, for fraud to occur, a subcontractor must make a false statement that serves as a trigger for the government to make a payment.

“Some lower courts had previously ruled that the [False Claims Act] has an implicit requirement that a false statement be ‘material,’” Hesch said. “The Supreme Court’s decision will give life to that line of defense and create an enormous amount of litigation regarding just how material it must be.”

While this may create an additional burden for the government, it is not likely to create a significant barrier in most cases, Hesch said. Where this ruling will likely have the largest effect is on grants and commercial contracts where it may not be clear to subcontractors or subgrantees that the federal government will be the ultimate source of funds, Hesch said.

The attorney for the whistleblowers in the Supreme Court case, Allison Engine Co. Inc., et al. v. United States ex rel. Sanders et al., said he believes the ruling will make it easier for his clients to prove fraud occurred. That’s because the whistleblowers, who are former employees of General Tool Co., a co-plaintiff with Allison Engine Co., have evidence to show the subcontractors falsified certificates saying their products met federal contract specifications. Those documents were submitted to the government by the prime contractor.

Subcontractors Allison Engine, General Tool Co. and Southern Ohio Fabricators have argued they are not liable for prosecution under the False Claims Act for allegedly producing shoddy parts for Navy destroyers because they never presented claims about the parts to the government itself. In 2006, an appellate court ruled agreed with the companies.

The subcontractors made those false claims to the private shipyards that were the prime contractors overseeing subcontractor work on behalf of the government.

“As a lawyer trying to figure out what the statute requires, the Supreme Court’s decision makes it easier because they tell you what they’re looking for,” said James Helmer, an attorney for the two whistleblowers in the case, Roger Sanders and Roger Thacker. “When you put your evidence together you’ll know what you’re looking for, so that helps a great deal.”

The companies’ arguments, which the Supreme Court upheld, rested on a 2004 appellate court decision — United States ex. rel. Totten v. Bombardier Corp. — which forces the whistleblower to prove the subcontractor presented the false claim to the government. The Totten case was decided by now Chief Justice John Roberts when he was still on the appellate circuit.

But others disagree with Helmer’s interpretation of the ruling. The court’s burden of proof is difficult to meet because often the government never sees the invoices a subcontractor submits to the prime contractor on a government contract, said David Colapinto, general counsel for the National Whistleblower Center. Without that connection, the government will be hard pressed to prove a false claim under the court’s new standards, Colapinto said.

“The tragedy here is it is all government money,” Colapinto said. “The danger here is it’s going to create a license for subcontractors to steal taxpayer money and get away with it.”

The National Whistleblower Center is urging Congress to pass the False Claims Correction Act, sponsored by Sen. Charles Grassley, R-Iowa, which would broaden the scope of the False Claims Act to allow the government to pursue a case even if a false claim is not made directly to the government.

“I intend to fix this problem so we don’t create a free fraud zone for subcontractors,” Grassley said in a statement to Federal Times following the court decision.

“To say that knowingly submitting fraudulent invoices to a prime contractor is not enough to establish a ‘direct link’ between the fraudulent submission and the government’s decision to pay, makes it more difficult to prosecute fraud and poses a threat to the federal Treasury. The False Claims Act is often the taxpayers’ last chance to recover monies lost to fraud and abuse,” Grassley said.

Under the False Claims Act, the government can sue a company — in an amount up to three times the alleged damage — for defrauding the government. The act encourages whistleblowers to bring cases of fraud to the government’s attention by promising them a cut of the penalties paid if they win the case. False claims suits originally filed by whistleblowers are the most common way fraud against the government is brought to light, and this ruling damages that important tool, Colapinto said.

The Justice Department is still studying the case, a department spokesman said. The Supreme Court ordered the case back to district court.