Contractors feel the pinch of false claims act cases

Contractors feeling beset by false claims act lawsuits, feel that way for good reason. The number of cases launched by the Justice Department reached an all-time high last year: 500 cases. How come? For details, the Federal Drive with Tom Temin spoke with Perkins Coie partner Alexander Canizares.

Interview Transcript: 

Tom Temin You’ve compiled these and 500 cases. What is behind this uptick? What’s going on here?

Alexander Canizares Well, there’s a number of things you could draw from this. I think the uptick in numbers of cases that DOJ initiates on their own reflects, in part, a reliance on data analytics that DOJ is using to identify cases. Remember that False Claims Act a large number of cases every year are driven by lawsuits filed by whistleblowers. So under the qui tam provisions of the False Claims Act, and that’s still continues to be the case. The particular metric that you just mentioned, I think is significant, 500 new cases that DOJ is bringing on its own. So these do not originate from a qui tam lawsuit. Looking at those numbers, I think 378 of those numbers come from cases that are not health care or Department of Defense related. And I suspect that reflects a large number of cases related to pandemic fraud. So that is a continuing priority of the Department of Justice to bring these PPP loan fraud types of cases that we’re seeing. Nevertheless, I think it’s fair to say that DOJ is actively enforcing the False Claims Act.

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Tom Temin And if it was pandemic fraud, they could probably have 10,000 cases a month. Is there a floor or a dollar value that they suspect has been going wrong, that set some kind of a bottom limit for what they’ll go after?

Alexander Canizares Well, the PPP loan fraud cases that they’ve been bringing have tended to be low dollar value cases. But there are some larger value cases that DOJ is bringing as well. And I think that just underscores the fact that the False Claims Act can be used for small companies. These cases can be brought against big companies. And I think the PPP loan cases reflect that DOJ is willing to invest in these cases. As a policy matter, regardless of the dollar value, it’s just an important priority for the department.

Tom Temin And how much is the government recovered in the same year that fiscal 2023?

Alexander Canizares In fiscal year 2023, DOJ, the numbers show that they recovered $319 million in other cases. So that’s not DoD, not health care related. And I suspect that a good number of those do relate to these pandemic types of cases.

Tom Temin And health care fraud then is mostly Medicare, Medicaid, that type of thing.

Alexander Canizares Yes. The health care types of cases under the False Claims Act continue to be the driver for a lot of the False Claims Act. The variety of cases involving doctors and physicians and hospitals, pharmaceutical companies is significant. But the numbers this year actually show that the proportion of cases related to health care is a little bit lower. We’ve actually seen more procurement types of cases this year than in prior years. And again, with those pandemic numbers, the dominance of healthcare types of cases has ebbed a little bit.

Tom Temin And what about the DoD cases? Is there any particular quality or characteristic that characterizes them?

Alexander Canizares Yes. So the statistics show that the DoD types of cases increased more than five times in fiscal year 23 from the prior year, so that was $550 million in recoveries. There was a single settlement of about 377 million that really drove that number. But that was the largest recovery in DoD false claims act cases since 2006. So that was a sign that for government contractors, the types of companies that I work with, that the False Claims Act continues to be a very robust enforcement tool for the government.

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Tom Temin And what do we know about that 377 million? Who was it?

Alexander Canizares That was a settlement with Booz Allen Hamilton. It was a case that took some time to finally get settled, but it was a case involving allegations related to cost counting.

Tom Temin We’re speaking with attorney Alexander Canizares. He is a partner at Perkins Coie. And I guess my question for the Department of Justice is if they are using data analytics, are they finding things that, for example, the Defense Contract Audit Agency is not finding, because isn’t that also a source of false claims activity?

Alexander Canizares It is. And I’d say the [Defense Contract Management Agency (DCMA)] and DCAA and the offices of Inspector General are all entities that tend to identify these kinds of cases. And I think DOJ’s use of statistical analytics is predominantly focused on health care types of cases, from what I can tell. But that’s not to say that these procurement types of cases can’t originate from that type of analysis. I think the biggest area that we’re seeing in terms of enforcement activity for government contractors relates to cybersecurity. And in the same context as announcing these statistics, the head of the civil division for DOJ highlighted the priority for cybersecurity under the DOJ civil cyber fraud initiative, and that remains a very big area of activity.

Tom Temin And as the other parts of the government, the Labor Department, basically the White House, but through the Labor Department’s compliance division and through the White House rulemaking apparatus and the different agencies, there’s a lot more rulemaking. The CMMC program for DoD. There could be a civilian version of that, not far behind, there are so-called climate provisions being laid on contractors and the DEI provisions laid on contractors. It sounds like the potential for false claims is expanding.

Alexander Canizares I think that’s fair to say. Remember, the False Claims Act is a civil fraud statute and it’s basically based on an alleged misrepresentation of some kind. And as you’re seeing these new compliance programs, particularly with cybersecurity, but the others you’ve mentioned as well. Any time a contractor submits a claim and there is an allegation that there is an underlying noncompliance with some material requirement in their contract, that can be a potential basis for false claims act allegation. A large number of these cases can be started by a whistleblower. So somebody inside a company who thinks that this company is doing something wrong can file a lawsuit, and DOJ has an obligation to undertake an investigation in that context. So I agree with you that with these new regulations, there is an increased risk in terms of False Claims Act liability.

Tom Temin Yeah. It sounds like a company could even be wanting to comply. Not that you want to let anybody off the hook for lying to the government, but there could be a big compliance exercise, and a whistleblower could find some minor infraction of one of these things. And next thing you know, you’ve got a case on your hands. So intention does not save you from false claims, does it ever?

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Alexander Canizares Well, this was an issue that the Supreme Court actually waded into last year in a case called SuperValu. And what they did is they analyzed the meaning of the term knowledge under the False Claims Act. And this is an area that has been litigated heavily for many years. But finally, the Supreme Court said that knowledge requirement under the False Claims Act has to be looked at using a subjective standard. So what is your subjective intent when you’re preparing a claim and you’re asking the government for money? And I think the takeaway from that case is for many companies in this area, they’re heavily regulated. They need to document their decision making. They need to reflect that they’re making good faith determinations. There is a knowledge requirement to the liability. So a good faith, reasonable interpretation should not run you afoul of the False Claims Act. But there’s a lot of gray area in there in terms of whether you actually are running afoul of the requirement.

Tom Temin And the big companies, you would think, Booz Allen and the big aerospace contractors, etc. They have compliance departments. They have senior counsel for compliance. What’s your sense of whether smaller and mid-sized companies have the compliance capacity, even if they want to do business with the federal government?

Alexander Canizares A lot of smaller companies do not have the same resources for compliance. And in some cases that increases the risk. They really need to be sensitive to the False Claims Act and anything they do if they’re taking government money. And for many of the companies that we work with, it’s a matter of really prioritizing how you allocate your resources. Again, I mentioned cybersecurity because the risk for cybersecurity is specifically targeted at the small companies in the supply chain. And yet those are the ones who maybe have fewer resources to allocate towards it.

Tom Temin So it’s a rocky world out there.

Alexander Canizares I think it’s fair to say it’s a rocky world for the foreseeable future.

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