False Claims Presentation by Jim Thiel Wisconsin DOT March 2009
The following document is a presentation prepared by Mr. Jim Thiel, Counsel, Wisconsin Department of Transportation. The presentation provides basic information about the False Claims Act and its relation to highway projects. As such, this document does not constitute legal advice and does not represent the official policy of the Wisconsin Department of Transportation, the Federal Highway Administration (FHWA) or the United States Department of Transportation. It is provided for informational purposes only.
THE LATEST DEVELOPMENTS IN FALSE CLAIMS ACTS 1
I. FEDERAL FALSE CLAIMS ACT - 31 USC 3729 to 3732 2
Congress passed the Emergency Economic Stabilization Act in October 2008 that created TARP, the $700 billion Troubled Asset Relief Program. Congress has passed another $800 or so billion economic recovery and stimulus package in February 2009, the American Recovery and Reinvestment Act of 2009, P.L.111-5. The risk of waste and fraud has increased exponentially. As Neil Barofsky, the special inspector general for TARP, recently remarked:
"We stand on the precipice of the largest infusion of government funds over the shortest period of time in our nation's history. Unfortunately, history teaches us that an outlay of so much money in such a short period of time will inevitably draw those seeking to profit criminally."
To fully address this potential vulnerability, the federal False Claims Act (FCS) has taken on heightened importance and attention. It imposes huge civil liability upon any person who knowingly presents, or causes to be presented, to an officer or employee of the United States Government a false or fraudulent claim for payment or approval. It applies to contracts with the federal government and also to partially federally funded contracts or grants or payments to recipients. The broad coverage includes evasion of payment for federal services or benefits. It passed constitutional review in Vermont Agency of Natural Resources v. United States ex rel. Stevens, 529 U.S. 765, 146 L.Ed.2d 836, 120 S. Ct. 1858 (2000), a case in which it was also decided it applies to any person, but "person" does not include States. In 2003 the United States Supreme Court ruled in Cook County v. United States ex rel. Chandler, 538 U.S. 119, 123 S. Ct. 1239 (2003) that local governments are "persons" subject to the False Claims Act, including treble damages. Here are some of the basics when considering FCA exposure and litigation:
- Qui Tam. 3
The heart of the FCA is its authorization for private individuals to bring a civil action against the fraudulent claimant in the name of the person and the U.S. government. Because there may be more fraud occurring than the federal government can possibly prosecute or pursue on its own, the FCA is aimed at encouraging private parties to ferret out false claims and report them. Introduced by Abraham Lincoln in 1863 to target sales of bad food, clothes, gunpowder etc. to the Union. In 1986, the FCA was revitalized and incorporated new anti retaliation provisions.
The United States gets time to decide if it wants to pursue the action in its own name. The person who brings the action gets up to 30% of the recovery. If the U.S. jumps in to take over the case, the person who started it still gets at least 15% and no more than 25% of the recovery. 6-year statute of limitation, 3 years from should have found claim false, no more than 10 years. Allows recovery of state or local funds involved in the fraud in the same case. Government employees may initiate the action themselves if federal government has not initiated the action or the false claim is not already publicly disclosed. In 2008, two whistle-blowers shared $92 million of a $650 million Medicaid billing-fraud settlement against Merck & Co. United States ex rel. Lacorte v. Merck & Co, No. 99-CV-3807, settlement agreement filed (E.D. La., New Orleans Feb. 7, 2008).
- Statute of Limitations. Must be filed within six years of the violation or within three years of the date was known or should have been known, but no more than ten years after false act. 31 USC 3731(b)
- No Pro Se Relators. Pro se relators may not prosecute qui tam actions. Stoner v. Santa Clara County Office of Educ., 502 F.3d 1116, 1126-28 (9th Cir. 2007); United States ex rel. Lu v. Ou, 368 F.3d 773, 775-76 (7th Cir. 2004); United States v. Onan, 190 F.2d 1, 6-7 (8th Cir. 1951). Timson v. Sampson, 518 F.3d 870, 873 (11th Cir 2008). United States ex rel. Mergent Servs. v. Flaherty, 2006 U.S. Dist. LEXIS 16475 (S.D.N.Y. Apr. 6, 2006) Rationale is personal right to represent self does not extend to representing government -- the United States - or other entities.
- No Parasites? Public disclosure may be a jurisdictional bar. The court considers three questions:
- Was there a public disclosure?
- If there was a public disclosure, was the qui tam action based on the public disclosure?
- If the action was based on the public disclosure, was the qui tam plaintiff an original source?
If either of the first two questions is answered in the negative, the district court has subject matter jurisdiction over the qui tam action.
If the first two questions are answered in the affirmative, however, subject matter jurisdiction exists only if the last question is also answered affirmatively. United States ex rel. Wilson v. Graham County County Soil & Water Conservation Dist., 528 F.3d 292, 299 (4th Cir. 2008); United States ex rel. Herndon v. Appalachian Reg'l Cmty. Head Start, Inc., 2009 U.S. Dist. LEXIS 7411, 3-4 (W.D. Va. Feb. 3, 2009).
Guidance on what falls within the "original source" exception to the public disclosure jurisdictional bar is found in Rockwell Int'l Corp. v. United States, 549 U.S. 457 (2007), including the requirement for "direct and independent knowledge" separate from the public disclosure. Note: The Fourth Circuit also applies a "derived from" standard and the D.C. Circuit applies a "substantially similar" standard in determining whether the public disclosure bar is applicable. The Supreme Court has not addressed the split between the Fourth Circuit and D.C. Circuit and application of the public disclosure bar must be "presumed to be uniform, whether or not it is in fact." Northwest Airlines, Inc., 188 F.3d at 700. United States ex rel. Chyrissa v. Columbia/Hca Healthcare Corp., 587 F. Supp. 2d 757 (W.D. Va. 2008)
- Government Employee Qui Tam Actions?A federal postal employee filed a qui tam action based upon information obtained in the course of her employment. Although such an employee might have to forfeit all or part of the recovery obtained in a qui tam action to her employer, the issue was not raised by the government or briefed by the parties. The Court concluded that the employee was entitled to proceed as a relator under 31 USC 3730(b)(1), and, because no "public disclosure" occurred within the meaning of 31 USC 3730(e)(4), the Court remanded the case for further proceedings. United States ex rel. Holmes v. Consumer Ins. Group, 318 F.3d 1199, 1214-1215 (10th Cir. Colo. 2003)
- First to File Bar: If the complaint alleges the same general conduct and theory as a previously filed False Claims Act action, United States ex rel. Branch Consultants v. Allstate Ins. Co., 2009 U.S. App. LEXIS 3503 (5th Cir. La. Feb. 18, 2009). 31 USC 3730(b)(5)
- Venue? The action can be brought in any federal district where the defendant can be found, resides, or does business. 31 USC 3732
- Automatic Stay Does Not Apply. False Claims Act civil action is sufficient to satisfy exception to bankruptcy automatic stay. Universal Life Church v United States (In re Universal Life Church) (9th Cir Cal. 1997) 128 F3d 1294,1298 cert den (1998) 524 US 952
- Plead With Particularity.Must meet pleading requirements of FRCP 9(b). "The False Claims Act] is an anti-fraud statute and claims under it are subject to the heightened pleading requirements of Rule 9(b)." United States ex rel. Fowler v. Caremark RX, L.L.C., 496 F.3d 730, 740 (7th Cir. Ill. 2007), cert. denied, 128 S. Ct. 1246. In another instructive case, the relator was allowed to amend in order to cure the pleading defect, but ultimately failed again with the court's dismissal of the Fourth Amended Complaint without leave to amend. United States ex rel. Radcliffe v. Purdue Pharma L.P., 2009 U.S. Dist. LEXIS 4770, 1-2 (W.D. Va. Jan. 25, 2009)
- Must Allege and Show Government Sustained Damages to Receive TREBLE Damages. The False Claims Act imposes two sorts of liability. First the submitter of the false claim is liable for a civil penalty, regardless of whether the submission of the claim actually causes the government any damages. Second, the submitter is liable for treble damages for damages which the government sustains as a result of the false claim. United States ex rel. Schwedt v. Planning Research Corp., 59 F.3d 196, 198-199 (D.C. Cir. 1995); United States ex rel. Davis v. District of Columbia, 591 F. Supp. 2d 30 (D.D.C. 2008). Evidence of payment is not necessary to state a claim but is relevant for determining damages. Abner v. Jewish Hosp. Health Care Servs., 2008 U.S. Dist. LEXIS 61985 (S.D. Ind. Aug. 13, 2008) 31 USC 3729(a)
B. SUBSTANTIVE ISSUES
- What's a False Claim?
- Knowing Conduct
- Intent to Have Government Pay.
- Claim can be any request for payment or equitable adjustment or extra work or change order.
- False can be just about any false representation, presentation, or certification related to contract performance and payment. Incorrect representation is not necessarily false and representation correct on its face may still be false [quantity correct, but quality not]. Contracts require contractors to honestly and accurately meet specifications and material requirements, submit proper statements, invoices, and the like.
- Knowing includes actual knowledge, deliberate ignorance, or reckless disregard. Proof of specific intent to defraud not required.
- Materiality means the contractor's misconduct or misrepresentation is linked to the governmental decision to pay.
- Presentment to Federal Government or Any Federally Funded Project or Contract? This was the big question recently litigated before the U. S. Supreme Court. Until 2004, courts routinely held the claim for payment that ultimately involved full or partial payment with federal funds did not have to be made directly to the federal government.
- United States ex rel. Totten v. Bombardier Corp., 380 F.3d 488 (D.C. Cir. 2004). Current Chief Justice Roberts, before he was Chief Justice and before he was on US Supreme Court, decided the claim had to be presented directly to the federal government in an earlier 2-1 decision in which he was with the majority.
- Allison Engine Co. v. United States (07-214); United States ex rel. Sanders v Allison Engine Co., 471 F.3d 610 (6th Cir. 2006), the 6th Circuit disagreed and held that the FCA applies to any invoice ultimately paid in whole or in part with federal government funds.
- Resolution Needed. For example, USDOT/FHWA federally funded programs involve partial reimbursement for the payments initially made by state or local governments. An admittedly false claim submitted to PennDOT and a subsequently fired PennDOT whistleblower employee's action was dismissed due to no direct presentment of the admittedly false claim to FHWA/USDOT. United States DOT ex rel. Arnold v. CMC Eng'g, 2007 U.S. Dist. LEXIS 9118 (W.D. Pa. Feb. 6, 2007) [Settled later.] Opposite result [indirect presentment ok] involving a UDOT federally funded highway contract reached in United States ex rel. Maxfield v. Wasatch Constructors, 2005 U.S. Dist. LEXIS 10162 (D. Utah May 27, 2005). See also United States v. Sequel Contrs., Inc., 402 F. Supp. 2d 1142, 1150 (C.D. Cal. 2005) holding liability arises where a defendant presents false claims to a state or county, which then presents the false claims to the federal government/ USDOT. See also: Whistle Stop: A split among federal courts means that Chief Justice Roberts may have an opportunity to revisit his 2004 decision limiting whistle blower suits. 28 Los Angeles Lawyer 25
Supreme Court Resolves. The case was argued on appeal before the US Supreme Court February 26, 2008. It was hoped by some that the Supreme Court's decision would make it clear nationwide that the scope of the federal False Claims Act covers contractor/ subcontractor/ consultant claims submitted to a state or local intermediary government on partially federally funded contracts. Many federally funded programs involve partial reimbursement for the payments initially made by state or local governments. Here is full description of what was before the court.
The Supreme Court's decision was issued June 9, 2008, Allison Engine Co. v. United States ex rel. Sanders, 128 S. Ct. 2123 (U.S. 2008):
The decision takes somewhat of a middle ground between the previous conflicting Circuit Courts of Appeals decisions of Totten and Allison. The Supreme Court concluded the statute does not extend liability to any entity ultimately receiving federal funds directly or indirectly, contrary to the 6th Circuit. However, the Supreme Court did hold that the False Claims Act applies to subcontractors on government-funded projects without direct presentment of the claim to the government, contrary to the DC Circuit decision.
The Supreme Court rejected the notion in the Totten decision that a false claim has to be "presented" to the government. It announced that the test for liability under two subsections of the statute is whether the false statement was made for the purpose of causing the government to pay a false claim. A subcontractor is liable if it makes a false statement to the prime contractor with intent that the statement to be used by the prime contractor to get the Government to pay its claim even if the prime contractor never "presents" this subcontractor false statement to the government:
"This does not mean, however, that [the FCA (2)] requires proof that a defendant's false statement was submitted to the Government. Because the section requires only that the defendant make the false statement for the purpose of getting "a false or fraudulent claim paid or approved by the Government," a subcontractor violates [the FCA (2) if it submits a false statement to the prime contractor intending that contractor to use the statement to get the Government to pay its claim." Allison Engine Co. v. United States ex rel. Sanders, 128 S. Ct. 2123 (U.S. 2008)
- Potential Civil Penalties
- Remedy is three times the amount of each fraudulent claim plus a civil penalty of $5,500 to $11,000 per false claim. Actual payment of false claim not required. Treble damages have a compensatory aspect; serving remedial purposes over and above any punitive objectives and in some ways were adopted as a "substitute for consequential damages." Cook County v. United States ex rel. Chandler, 538 U.S. 119, 130, 131 n.9, 123 S. Ct. 1239, 155 L. Ed. 2d 247 (2003).
- See also: United States ex rel. Shutt v. Cmty. Home & Health Care Servs., referred to in 550 F.3d 764, UNPUBLISHED 2008 U.S. App. LEXIS 27286 (9th Cir. Cal. Dec. 16, 2008). False Claims Act does not violated constitutional prohibition against double jeopardy and excessive fines.
$50 Million (2006) - Daewoo Engineering and Construction. The contractor filed a claim for $64 million in equitable adjustments against the United States relating to a road construction contract. A federal contracting officer had rejected the claim. The U.S. filed a counterclaim under the False Claim Act (FCA). After an extensive review of the testimony of Daewoo's witnesses, whom the court found to lack credibility, it concluded that Daewoo's claims for an equitable adjustment were fraudulent, and that it had violated the FCA by knowingly submitting false or fraudulent claims; that it had violated the CDA by submitting false or fraudulent claims with intent to deceive or mislead the government. It dismissed Daewoo's claim against the U.S. and entered a judgment exceeding $50 million in favor of the U.S. Daewoo Eng'g & Constr. Co. v. United States, 73 Fed. Cl. 547 (Ct. Cl. 2006). Upheld on appeal February 20, 2009: Daewoo Eng'g & Constr. Co. v. United States, 2009 U.S. App. LEXIS 3048 (Fed. Cir. Feb. 20, 2009)
$92 Million for Two Qui Tam Relators (2008) Two whistle-blowers shared $92 million of a $650 million Medicaid billing-fraud settlement against Merck & Co. United States ex rel. Lacorte v. Merck & Co, No. 99-CV-3807, settlement agreement filed (E.D. La., New Orleans Feb. 7, 2008).Qui Tam.
$23 Million Federal and $40 Million State FCA Settlement (2008) Bechtel Infrastructure Corp. and PB Americas Inc. agreed to pay $458 million to settle U.S. and Massachusetts false claim act allegations relating to the "Big Dig" in Boston. Part of the settlement involved a qui tam action.
- Anti-Retaliation Provisions. For an anti-retaliation claim to succeed, an employee must prove that
- He took acts in furtherance of a qui tam suit . . .;
- His employer knew of these acts; and
- His employer discharged [adverse action against] him as a result of these acts. Eberhardt v. Integrated Design & Constr., Inc., 167 F.3d 861, 866 (4th Cir. 1999). United States ex rel. Herndon v. Appalachian Reg'l Cmty. Head Start, Inc., 2009 U.S. Dist. LEXIS 7411 (W.D. Va. Feb. 3, 2009)
The anti-retaliation provision of the False Claims Act recognizes that fraud committed by a corporation or a local government may often be discovered by an employee and that employers may "not take kindly to having their crimes nosed out." Lang v. Northwestern University, 472 F.3d 493, 495 (7th Cir. 2006). To encourage employees to speak out, the FCA prohibits an "employer" from "discriminat[ing]" against "any employee . . . because of lawful acts done . . . in furtherance of an action under this section." In general, public employees have little if any "matter of public interest" first amendment protection for speech related to their jobs. However, public employees have anti-retaliation/ whistleblower protection under the federal false claims act.
An eight-year study 4 by a Virginia Tech sociology professor, which involved interviews with 300 whistleblowers and more than 200 silent observers (people who observed wrongdoing but chose to remain silent), found that 69 percent of the whistleblowers were fired as a result of exposing wrongdoing.
- Must Be An Employee: Courts have limited application of the whistleblower protection provisions in 31 USC 3730(h) to "the conventional master-servant relationship as understood by common-law agency doctrine. Campion v. Northeast Utils., 2009 U.S. Dist. LEXIS 14253 (M.D. Pa. Feb. 24, 2009)
- New Whistleblower Protection: Section 1553 of the American Recovery and Reinvestment Act of 2009, P.L.111-5, contains extensive new provisions protecting state and local government and contractor whistleblowers. A copy of this provision is attached. Appendix G.
Preventive Measures. The January 2009 Issue of McKnight's Long Term Care News contain the following advice by John Durso, Esq. Ungaretti & Harris LLP: "An effective compliance program should incorporate billing and coding audits and ongoing compliance training. A compliance program should encourage employees and other individuals with potential fraud and abuse concerns to initially report their concerns internally in a non-retaliatory environment. With this, providers have an opportunity to correct issues once they become aware of them-reducing the possibility that the government will claim "knowledge" or "deliberate ignorance" or "reckless disregard" which then triggers FCA penalties."
Some Tips Provided: John L. Sinatra Jr. provided the following tips to prevent False Claims Act violations in a longer article in the March 4, 2009 New York Law Journal:
- Institute a compliance program.
- Address problems.
- Evaluate business partners.
- Maintain good employee relations.
- Look out for government overpayments.
- Reduce payments to the government carefully.
- Bill and contract carefully.
- Disclose product shortcomings.
C. TWO PENDING US SUPREME COURT CASES.
On January 16, 2009, the Supreme Court accepted U.S. ex rel. Eisenstein v. City of New York 5 to determine whether the 30-day time limit in FRAP for filing a notice of appeal by an individual, or the 60-day time limit for the U.S. applies to a qui tam action under the False Claims Act, when the United States has declined to intervene in that action. The US Court of Appeals for the Second Circuit found that the 30-day time limit applies. 6
The case of United States ex rel. Wilson v. Graham County County Soil & Water Conservation Dist., 528 F.3d 292 (4th Cir. 2008) mentioned above is under consideration by the Court on the issue whether the public disclosure jurisdictional bar in § 3730(e)(4)(A) applies to reports issued by state and local authorities. The 4th Circuit found that the statute applied only to reports issued by federal agencies. The Solicitor General is invited to file a brief in this case expressing the views of the United States. Graham County Soil & Water Conservation Dist. v. United States ex rel. Wilson, 129 S. Ct. 753 (U.S. 2008).
D. PENDING LEGISLATION
Two bills in previous Congress did not pass. They were intended to further clarify and carry out the intent of the False Claims Act. H.R. 4854: False Claims Act Correction Act of 2007, Reported out of Committee Jul 16, 2008, Rep. Howard Berman [D-CA], Rep. Sensenbrenner of WI was a co-sponsor and S. 2041: False Claims Act Correction Act of 2007, reported out of Committee, July 29, 2008 Sen. Charles Grassley [R-IA]. The September 2008 Senate Committee Report is available at online.
The legislation will likely be reintroduced this session of Congress as stand-alone bills or as additions to the various economic recovery/ stimulus packages. In the rush to push more money into the economy, it is likely that qui tam actions will have to substitute for government hiring for sufficient oversight to prevent fraud and waste.
S. 386: Fraud Enforcement and Recovery Act, introduced this session in February 2009, among other things is intended to clarify that the False Claims Act extends to any false or fraudulent claim for government money or property, whether or not the claim is presented to a government official or employee, whether or not the government has physical custody of the money, and whether or not the defendant specifically intended to defraud the government.
According to Senator Chuck Grassley, the bill redefines "financial institution" to include mortgage lending businesses and amends the statute making it illegal to make false statements on a mortgage application to include false statements and appraisals by mortgage brokers and agents. It also makes changes to the FCA that will make it more difficult for fraudfeasors to evade liability simply by hiring or creating subcontracting entities.
Passed Senate Committee on March 5, 2009. People rob banks go to jail; bankers who rob people go to jail.
S. 458: False Claims Act Clarification Act of 2009 (Introduced in Senate). While generally clarifying and expanding the reach of the False Claims Act, the bill proposes to restrict or prohibit a federal government employee from pursuing a qui tam action over the federal government's objection if the the employee learned of the information in the course of the person's employment by the United States.
S. 474: Congressional Whistleblower Protection Act of 2009. (Introduced in Senate) Specifically protects from retaliation congressional employees who report violations or laws or regulations.
E. APPLICABITY OF NEW FEDERAL ACQUISITON REGULATIONS
New Federal Acquisition Regulations became effective December 12, 2008 that apply to contractors with the federal government. The rule provides for the suspension or debarment of a contractor for knowing failure by a principal to timely disclose, in writing, to the federal agency Office of the Inspector General, with a copy to the federal contracting officer, certain violations of criminal law, violations of the civil False Claims Act, or significant overpayments. The final rule implements "The Close the Contractor Fraud Loophole Act," Public Law 110-252, Title VI, Chapter 1, which was enacted on June 30, 2008 as part of the Supplemental Appropriations Act of 2008. The statute defines a covered contract to mean "any contract in an amount greater than $5,000,000 and more than 120 days in duration." The final rule also provides that the contractor's Internal Control System shall be established within 90 days after contract award. The internal control system is not required for small businesses or commercial item contracts. This is a link to the new regulations.
II. STATE AND LOCAL FALSE CLAIMS ACTS.
About 23 States Have Their Own Statutory False Claims Acts. About 5 are limited to Medicaid false claims. Various wrinkles. www.taf.org/statefca.htm
Some of the laws allow local governments to enact conforming local ordinances. Some larger cities may enact local false claims ordinances, not necessarily identical to state statutes. These are civil actions. Appendix B is a Table of "States with False Claim, False Statement, and Other Fraud Statutes" derived from
"NCHRP 20-6, Study Topic 13-1, A Survey of State DOT Practices Involving False Claims Act, Disadvantaged Enterprise Fraud, and Contractor Suspension and Debarment"
- Benefits of state and local false claim acts.
- Applies with or without any federal funding.
- Local control and initiation of action.
- Avoids coverage and scope issues discussed by U.S. Supreme Court
- Moneys collected available to local government.
- Deters false or inflated claims.
- More States Considering State False Claims Acts or Broader State False Claims Acts modeled on the federal act: Minnesota, Connecticut, Pennsylvania, New Jersey, Arizona
III. MANY OTHER POTENTIAL REMEDIES FOR FALSE OR INFLATED CLAIMS AND CONTRACT CHANGE ORDERS - FROM GOVERNMENT PERSPECTIVE
A. GENERAL ADMINISTRATIVE
IMPOSE CONTRACTOR PREQUALIFICATION CONDITION THAT CONTRATORS MUST ADOPT AND IMPLEMENT THE FOLLOWING MODEL CODE OF ETHICS.
See below especially with regards to claims and certifications:
REQUIRE INDEPENDENT PRIVATE SECTOR INSPECTOR GENERAL AS A PROVISION IN CONTRACTS TO BE INVOKED AT DISCRETION OF OWNER. Examples of independent private sector inspector general service providers:
- SETOFF. Estimate, document and unilaterally deduct amount of false or inflated claim and costs of investigation from moneys otherwise due and payable by owner to contractor or consultant.
- LIQUIDATED DAMAGES FOR FALSE CLAIMS. Include new provision in standard contracts that allows owner to collect by setoff additional agreed upon liquidated damages for false or inflated claims that are double or triple the amount of the excess or false claim.
- CLAIM AGAINST PERFORMANCE AND PAYMENT BOND. Notify bonding company/surety and collect on performance and payment bond for false or inflated claims including any liquidated damages. Note: Under standard wording of bonds, contractor typically has to refuse before owner can collect from bonding company/surety.
- IMMEDIATELY DISALLOW BY REGION OR RESTRICT/REDUCE CAPACITY RATING BY REGION based on reasonable suspicion of false or inflated claims or quality of work. Also remove consultants from eligible list/do not select. Put a disallowance procedure in place.
- IMMEDIATELY AND SUBSTANTIALLY REDUCE PREQUALIFICATION RATING BASED ON SAME REASONABLE SUSPICION.
- CONTINGENT SUSPENSION. Provide written notice of suspension effective prospectively unless certain conditions set by owner are met. Provide copy of contingent suspension to surety.
SUSPENSION - Example: Trans 504.06(2), Wis. Admin. Code Causes For Suspension.
(a) The department may suspend a contractor whenever it finds adequate evidence that the contractor has engaged in one or more of the following:
- 1. Fraud, collusion or any criminal offense in connection with obtaining, attempting to obtain or performing a public contract or subcontract;
- 3. Embezzlement, theft, forgery, bribery, falsification or destruction of records, making false statements, receiving stolen property or obstruction of justice; or
- 4. Any other offense indicating a lack of business integrity or of business honesty, seriously and directly affecting the responsibility of the contractor or subcontractor.
(c) The department may suspend a contractor whenever it finds adequate evidence of any other cause of so serious or compelling a nature that it affects the responsibility of a contractor or subcontractor.
DEBARMENT - Example: Trans 504.05(2), Wis. Admin. Code. CAUSES FOR DEBARMENT: The secretary may debar a contractor for any one or more of the following causes:
(b) Violation of the terms of any government contract or subcontract when that violation is so serious as to justify debarment, including:
- Willful failure to perform in accordance with a contract; or
- A history of failure to perform or of unsatisfactory performance of one or more contracts.
(c) Any other cause that is so serious or compelling that it affects the responsibility of a contractor or subcontractor.
- ADOPT INTENAL MANUAL OR SIMILAR DIRECTIVE requiring owner employees to report fraud, waste or abuse and how to do it. Incorporate reference to employee whistleblower protection.
B. OTHER LIMITED STATE LAW REMEDIES - EXAMPLES
CIVIL - MISREPRESENTATION. Collect money through civil misrepresentation action. The elements of a claim for intentional misrepresentation are: (1) a false representation of fact; (2) made with intent to defraud and for the purpose of inducing another to act upon it; and (3) upon which another did in fact rely and was induced to act, resulting in injury or damage. D'Huyvetter v. A.O. Smith Harvestore Prods., 164 Wis.2d 306, 320, 475 N.W.2d 587, 592 (Ct. App. 1991). The last element appears to require actual payment of false claim.
802.03. Pleading special matters. FRAUD, MISTAKE AND CONDITION OF MIND. In all averments of fraud or mistake, the circumstances constituting fraud or mistake shall be stated with particularity. Malice, intent, knowledge, and other condition of mind of a person may be averred generally.
Wisconsin does not have state civil false claims legislation applicable to highway and transportation work like the federal government. About 23 states have applicable state false claims acts.
The American Bar Associations 2007 Book "False Claims in Construction Contracts," Chapter 11, identifies Arizona, California, Colorado (pending), Delaware, Hawaii, Illinois, Indiana, Louisiana, Massachusetts, Montana, Nevada, New Hampshire, Tennessee, and Virginia as states with false claims acts applicable to construction contracts. (14 States, including pending in Colorado)
- FALSE SWEARING/PERJURY
946.32 False swearing. (1) Whoever does either of the following is guilty of a Class H felony:(a) Under oath or affirmation makes or subscribes a false statement which he or she does not believe is true, when such oath or affirmation is authorized or required by law or is required by any public officer or governmental agency as a prerequisite to such officer or agency taking some official action.
946.31 Perjury. (1) Whoever under oath or affirmation orally makes a false material statement that the person does not believe to be true, in any matter, cause, action or proceeding, before any of the following, whether legally constituted or exercising powers as if legally constituted, is guilty of a Class H felony:
[Note: In order to more readily invoke either of these provisions, owner could include new provisions requiring formal oaths or affirmations in claim or change order forms or periodic contractor acceptance of payment documents. Put in Standard Specifications.]
- CRIMINAL -THEFT BY FRAUD AND ATTEMPTED THEFT BY FRAUD.
943.20(1) Acts. Whoever does any of the following may be penalized as provided in sub. (3):
(d) Obtains title to property of another person by intentionally deceiving the person with a false representation which is known to be false, made with intent to defraud, and which does defraud the person to whom it is made. "False representation" includes a promise made with intent not to perform it if it is a part of a false and fraudulent scheme.
943.20(3) Penalties. Whoever violates sub. (1):
(c) If the value of the property exceeds $10,000, is guilty of a Class G felony.
939.50(3)(g) For a Class G felony, [the penalty is] a fine not to exceed $25,000 or imprisonment not to exceed 10 years, or both.
939.32 Attempt. (1) Generally. Whoever attempts to commit a felony or a crime specified in s. 940.19, 940.195, 943.20, or 943.74 may be fined or imprisoned or both as provided under sub. (1g)…:
939.32(1g) Maximum penalty. The maximum penalty for an attempt to commit a crime that is punishable under sub. (1) (intro.) is as follows:
(a) The maximum fine is one-half of the maximum fine for the completed crime.
(b) 1.If neither s. 939.62 (1) nor 961.48 is being applied, the maximum term of imprisonment is one-half of the maximum term of imprisonment, as increased by any penalty enhancement statute listed in s. 973.01 (2) (c) 2. a. and b., for the completed crime.
971.34 Intent to defraud. Where the intent to defraud is necessary to constitute the crime it is sufficient to allege the intent generally; and on the trial it shall be sufficient if there appears to be an intent to defraud the United States or any state or any person.
- FALSE SWEARING/PERJURY
C. FEDERAL REMEDIES -- ROBUST
- ADMINSTRATIVE ACTION AND HEARING FOR FALSE CLAIMS AND STATEMENTS - 31 USC 3801 to 3805. This is a general provision that allows federal agencies to initiate internal actions to collect moneys and invoke other penalties for false claims and statements. It is generally reserved to matters of less than $150,000 for internal false claims. It does not appear to be used often. The USDOT implementing rule is found in 49 CFR Part 31.
- FEDERAL SUSPENSION OR DEBARMENT -- 49 CFR Part 29 [USDOT's agency codification of the federal Common Rule for Nonprocurement Suspension and Debarment authorized and required by 31 USC 6101]. USDOT/FHWA may act much more slowly than local governmental owner. See Appendix C - Kasner 1 for example of federal delay - waited until after sentencing to debar whereas Wisconsin suspends upon indictment.
CIVIL PROVISIONS FOR FALSE CLAIM - These are some civil provisions that may also be used in addition to the FCA law and others mentioned above:
- CIVIL - STARK LAW -- FOR PROHIBITED PHYSICIAN REFERRALS. 42 USC § 1395nn(g)
- CIVIL - FORFEITURE OF FRAUDULENT CLAIMS ACT. 28 U.S.C. § 2514
- CRIMINAL - HIGHWAY FRAUD. [Note: This is included within all of federally funded contracts as part of the required FHWA-1273 insert and is required to be posted on Job Site] 18 USC 1020, 23 CFR § 633.101 and 23 CFR § 635.119 false statements. This is the statute recently used to prosecute and convict Kasner for prevailing wage rate fraud in Wisconsin. See Appendix D and Appendix E for press releases regarding plea and sentencing.
- CRIMINAL -- FALSE CLAIMS TO US --18 USC § 287. False, fictitious or fraudulent claims
- CRIMINAL - CONSPIRACY TO DEFRAUD US -- 18 USC § 371. Conspiracy to commit offense or to defraud United States
- CRIMINAL - THEFT FROM FEDERALLY FUNDED PROGRAM BY CONSULTANT - 18 USC §666 - When owner hires a consultant to manage a federally funded contract/project (act as project engineer), the independent consultant contractor with managerial responsibilities may be an "agent" of owner under 18 U.S.C. section 666, which prohibits theft from programs, receiving federal funds, by agents of the organizations which administer those programs. The case involved massive over billing by the consultant-engineering firm. US v. Vitillo, 490 F.3d 314 (CA 3 2007)
- CRIMINAL -- FALSE STATEMENTS OR MISREPRESENTATION TO US -- 18 USC § 1001. Statements or entries generally
(a) Except as otherwise provided in this section, whoever, in any matter within the jurisdiction of the executive, legislative, or judicial branch of the Government of the United States, knowingly and willfully--
- falsifies, conceals, or covers up by any trick, scheme, or device a material fact;
- makes any materially false, fictitious, or fraudulent statement or representation; or
makes or uses any false writing or document knowing the same to contain any materially false, fictitious, or fraudulent statement or entry;
"Noting that in a prosecution under 18 U.S.C.A. § 1001, the government is not required to prove that the defendants knew that federal funds were involved to show their knowledge of the falsity of their statements, the court in United States v Dick (1984, CA7 Ill) 744 F2d 546, (1) held that the government met its burden of proving that each defendant acted with the knowledge that each statement charged was false or with the conscious purpose of avoiding the truth, and (2) affirmed their convictions for statements made in connection with completion of a defaulted construction contract under performance bonds guaranteed by the Small Business Administration."
- CRIMINAL - FRAUDS AND SWINDLES -- 18 USC §§1341 and 1346. Participation in a scheme or artifice to deprive another of the intangible right of honest services? Definition of "scheme or artifice to defraud" See: United States v. Thompson, 484 F.3d 877 (7th Cir. Wis. 2007):
- CRIMINAL - FOR ACTS INVOLVING FEDERAL HEALTH CARE PROGRAMS, Anti-Kickback Statute, 42 USC § 1320a-7b
- CRIMINAL - ANTI-KICKBACK STATUTE, 41 USCS §§ 51-58, Prohibits kickbacks in Government contracts and subcontracts and imposes criminal penalties for violations of the statute.
IV. DEBARMENTS AND SUSPENSIONS.
The legal basis for debarment or suspension actions is the typical statutory wording that contracts are to be awarded to the lowest responsible bidder, or lowest competent and responsible bidder, or awarded "only on the basis of the lowest responsive bid submitted by a bidder meeting established criteria of responsibility." 23 USC 112(b)(1)
Debarment and suspension actions are one of the most effective tools of a public contracting agency. This tool is administered by the owner-contracting agency itself; it does not require a court or a standard of proof for a criminal case. Do not have to wait for court determination or conviction. The contracting agency's decision on debarment or suspension can be implemented quickly and the procedures and standards for judicial review defer to the agency's judgment. It does not create havoc as the contracting agency may require the debarred or suspended contractor to finish any pending existing contracts and subcontracts (a matter of discretion); can be tailored to future bids and quotes as contractors or subcontractors.
Although debarment or suspension is not as critical in the competitive selection process for engineering and other consultants under the Brooks Act, formal debarment or suspension has disqualifying effects far beyond the individual contract(s) in question.
A. Federal Debarment and Suspension
Common [Universal] Rule for Nonprocurement Suspension and Debarment authorized and required by 31 USC 6101 note 7 also known as the Nonprocurement Common Rule (NCR).
A nonprocurement transaction means any transaction similar to a federal grant program, cooperative agreement, loan, or assistance program as opposed to direct routine procurements of supplies by a federal agency. If the nonprocurement program transaction involves a state or local government obtaining supplies under that program, that procurement action is also covered.
Federal agencies adopt and implement the common rule with some optional variations provided in the common rule. For example, 49 CFR Part 29 is the USDOT's version of the common rule and adopts the optional lower tier coverage prohibiting excluded persons and entities from participating in subcontracts at tiers lower that the first tier below a covered transaction.
If a Federal agency excludes a person under its nonprocurement common rule on or after August 25, 1995, the excluded person is also ineligible to participate in Federal procurement transactions under the Federal Acquisition Regulations [FAR]. Therefore, exclusion under these contracting regulations has reciprocal effect in Federal procurement transactions
Federal agencies tend to act much more slowly than state and local governmental owners using their own suspension or debarment procedure.
Where Is the List of Debarred or Suspended Individuals or Entities? The federal government maintains a government wide list at
Individual federal agencies may maintain currently pending debarment or suspension information
What Is Effect?
In general, federal agencies will not enter into contracts with debarred or suspended persons or firms and will not allow their participation in federally funded programs. Contractors participating in federally funded contracts may not enter into subcontracts with debarred or suspended persons or firms. Contractors must certify they are not suspended or debarred or facing such action or disclose the matter. Contractors must certify they will not knowingly enter into any transaction with persons or firms who are debarred or suspended for a covered transaction. The federal requirements also prohibit contractors from purchasing more that $24,999 worth of goods and services from debarred or suspended firms or persons.
State Debarment and Suspension
States have independent and overlapping authority to debar or suspend contractors. Although a federal agency may await a conviction or sentencing prior to imposing a debarment or suspension, a state agency may act on its own to suspend a contractor pending investigation, or take final action based upon an indictment or an admission.
The duration of the suspension or debarment may differ under federal and state laws and regulations. The beginning and ending dates may likewise differ even if the duration is the same. State suspensions and debarments typically affect all contracts, not just contracts in which there are participating federal funds.
The scope of the debarment or suspension may also differ. States should, but might not, require certification from contractors that they have not been debarred or suspended prior to participation in a state or locally funded contract.
State agencies may have procedures that require some approval actions over those who participate in subcontracts or contracts with local grantees or reimbursement provision that also provide a means of barring suspended or debarred contractors.
An example of a state debarment or suspension regulation is Ch. Trans 504, Wis. Admin. Code. An example of a current listing is provided as Appendix F. Other means of implementation include prequalification requirements, bonding provisions, and restriction of access to bidding documents.
V. DISADVANTAGED BUSINESS ENTERPRISES (DBES)
A. Federal Uniform DBE Program for Federal Highway Administration, Federal Aviation Administration and Federal Transit Administration.
Other federal DBE preference programs exist, but this program appears to have the greatest effect on state and local governments and the largest number of contractors. It has also been a singularly great source of litigation and refinement.
It is a mandatory (in the sense of eligibility for state and local governments to obtain federal transportation funds) preference program for female and certain minority owned and controlled businesses. It involves the establishment by state and local governments of overall annual goals for DBE participation on federally funded contracts and a system of mandatory or voluntary subcontracting goals on individual federally funded contracts.
Federal Statutory Basis: Section 1101(b)(2) of SAFETEALU 8
"General rule.--Except to the extent that the Secretary determines otherwise, not less than 10 percent of the amounts made available for any program under titles I, III, and V of this Act and section 403 of title 23, United States Code, shall be expended through small business concerns owned and controlled by socially and economically disadvantaged individuals."
- Implementing Regulation: 49 CFR Part 26 - Participation by Disadvantaged Business Enterprises in Department of Transportation Financial Assistance Programs 9. A DBE is a for-profit small business concern -
- That is at least 51 percent owned by one or more individuals who are both socially and economically disadvantaged or, in the case of a corporation, in which 51 percent of the stock is owned by one or more such individuals; and
- One or more of these socially and economically disadvantaged individual owners actually control and manage its daily business operations.
B. DBE Fraud.
DBE fraud may occur when contractors or subcontractors falsify eligibility for the program or falsify the DBE conduct or activity claimed to meet the contract requirements. DBE fraud undermines the integrity of the program. Qualifying DBEs don't get the work. Contractors who seek to work with qualifying DBEs do not get contracts due to competitive disadvantages.
- $11.75 Million (2007) —Two Michigan Construction Firms Agreed To Pay U.S. $11.75 Million to resolve claims that they knowingly violated Disadvantaged Business Enterprise (DBE) contracting requirements for federally funded construction projects at Detroit Wayne County Metropolitan Airport. Ajax Paving Industries, Inc. and Dan's Excavating Inc. have agreed to pay the federal government $11.75 million to resolve False Claims Act claims against them. The companies faced charges they had misrepresented the amount of DBE contracting work performed by a concrete-supply DBE. Ajax and Dan's acted as prime contractors on three federally funded highway construction contracts at the Detroit Airport. The companies claimed a DBE subcontractor performed substantial work on the contracts when it actually performed little more than minor administrative tasks.
15 Months In Prison, Fines, Back Taxes, $1.1 Million (March 2008). Dorothy and Michael Loguidice of Island Park, New York-the owners of Andrea Doreen Construction Inc. (ADC) and JCS Construction, respectively-were sentenced in U.S. District Court, Central Islip, New York. Each defendant was sentenced to serve 15 months in prison, to be followed by 3 years of supervised release, and ordered to pay a fine of $12,500. In addition, they are jointly liable for paying restitution to the Internal Revenue Service for back taxes in the amount of $900,000. The Loguidices submitted materially false information, to New York City and New York State grantee agencies to obtain Disadvantaged Business Enterprise (DBE) certification. ADC, Mrs. Loguidice's certified DBE trucking and excavation company, was awarded several subcontracts, as a DBE, but Mr. Loguidice's company, JCS Construction, as well as several other companies he owned (in a lesser capacity), actually performed the work. As part of the conspiracy, the Loguidices obtained a total of approximately $7.8 million in DBE subcontracts that they were otherwise ineligible for.
The Loguidices have forfeited $1.1 million to the Government. This investigation was conducted jointly with members of the Long Island Federal Construction Fraud Task Force. The Loguidices and their companies were referred to FHWA for suspension/debarment in December 2007 and a decision in this matter is pending.
C. DBE Program Litigation - Challenges to Contracts.
Preference programs based upon race or gender have been the source of litigation for decades. All such programs are now subject to the same judicial standard of review for constitutionality, both as written and as applied.
In general, these programs are subject to strict scrutiny, must serve a compelling need and be narrowly tailored to achieve that purpose.
9th Circuit. — Binding law in the 9th Federal Judicial Circuit consisting of the states of Washington, California, Oregon, Alaska, Arizona, Idaho, Montana, Nevada, and Hawaii. Western States Paving Company v. Washington State Department of Transportation, 407 F.3d 983 (9th Cir. 2005); cert denied Vancouver v. W. States Paving Co., 126 S. Ct. 1332, 164 L. Ed. 2d 49, 2006 U.S. LEXIS 1153 (U.S., 2006) [Unconstitutional "as applied"; not narrowly tailored, insufficient evidence]
Evidence needed. The court decided that Washington State did not need to establish a compelling need for its DBE program, independent of the determinations that Congress made on a national basis. However, the court said that race conscious elements of a national program, to be narrowly tailored as applied, must be limited to those parts of the country where its race-based measures are demonstrably needed. Whether race-based measures are needed depends on the presence or absence of discrimination or its effects in a state's transportation contracting industry.
In addition, even when discrimination is present in a state, a program is narrowly tailored only if its application is limited to those specific groups that have actually suffered discrimination or its effects.
The court concluded that Washington State DOT's DBE program was not narrowly tailored because the evidence of discrimination supporting its application was inadequate.
On remand at, summary judgment was granted, in part, summary judgment denied, in part, some claims dismissed by W. States Paving Co. v. Wash. State DOT, 2006 U.S. Dist. LEXIS 43058 (W.D. Wash., June 23, 2006) [Damage claims remained against Washington DOT Under Title VI]
The significance of the case is that the states in that judicial circuit must develop evidence to support their overall annual DBE goals to satisfy the federal courts, and not just the USDOT. The evidence necessary to do this costs money by developing a disparity and availability study.
Many such studies have already been commissioned and presented to the satisfaction of courts. In addition, a model RFP is being developed to obtain these studies. See NCHRP Project 20-76, FY 2007 "Disparity/Availability Study Guidelines for State DOT Disadvantaged Business Enterprise (DBE) Programs"
- 7th Circuit. Binding law in the 7th Federal Judicial Circuit consisting of the states of Illinois, Indiana and Wisconsin. 10 Northern Contracting, Inc. v. Illinois DOT, 473 F.3d 715, 721 (7th Cir. 2007). A state is insulated from this sort of constitutional attack, absent a showing that the state exceeded its federal authority. Its earlier decision that WisDOT won remains applicable. See Milwaukee County Pavers v. WisDOT, 922 F.2d 419 at 424-25 (1991); Tenn. Asphalt Co. v. Farris, 942 F.2d 969, 975 (6th Cir. 1991).
- USDC Florida. S. Fla. Chapter of the Associated Gen. Contrs. V. Broward County, 2008 U.S. Dist. LEXIS 8630, 12-13 (D. Fla. 2008). Adopts reasoning of 7th Circuit. But suggests the federal regulations themselves may be unconstitutional as they do not require a disparity/availability study.
"IV. Analysis and Conclusion
After much consideration of the relevant case law, and the arguments made by the parties, this Court agrees with the approach taken by the Seventh Circuit in Milwaukee County and Northern Contracting, and concludes that the appropriate factual inquiry in the instant case is whether or not Broward County has fully complied with the federal regulations in implementing its DBE program.
As Plaintiffs conceded at oral argument, the federal regulations contain no explicit requirement that a recipient of funds carry out a disparity study. Indeed, a disparity study is only one of several options specified in the regulations for evaluating discrimination. If, as Plaintiffs argue, a disparity study is required to make the DBE program constitutional, then the absence of such a requirement in the regulations may make those regulations unconstitutional as applied. However, that issue is not before this Court in this case, because Plaintiffs have not challenged the as-applied constitutionality of the regulations themselves, but rather have focused their challenge on the constitutionality of Broward County's actions in carrying out the DBE program. This Court agrees with Judge Posner's opinion, and those in accordance with it, holding that this type of challenge is simply an impermissible collateral attack on the constitutionality of the [federal] statute and implementing regulations."
Contract Could Have Been Challenged:
State awarded out-of-state minority contract a choice job despite charging taxpayers $1.3 million more than the low bidder. The $29.5 million renovation and expansion of a UW-Stout science building, even though two larger Wisconsin firms underbid the contractor. Statute involved on its face and as applied unconstitutional?
D. Disparity and Availability Studies
NCHRP Project 20-76, FY 2007 "Disparity/Availability Study Guidelines for State DOT Disadvantaged Business Enterprise (DBE) Programs." Final Report was expected in September 2008, but has been delayed:
E. Prompt Payment
The federal DBE program regulation requires "prompt payment" of all subcontractors "for satisfactory performance of their contracts no later than 30 days from receipt of each payment" by the public body to the prime contractor. The regulation also provides that a subcontractor's work "is satisfactorily completed when all the tasks called for in the subcontract have been accomplished and documented" by the public agency. Also when the public body has made "an incremental acceptance of a portion of a prime contract, the work of a subcontractor covered by that acceptance is deemed to be satisfactorily completed." 49 CFR Part 26.29 (a) and (c). Each public agency provides different wrinkles in their contract clauses, but the federal regulations are the minimum required.
1 In 2007 the American Bar Association published "False Claims in Construction Contracts - Federal State and Local."
There is also a 2008 Year-End Federal False Claims Act Update dated January 8, 2009
3 "Q ui tam pro domino rege quam pro se ipso in hoc parte sequitur" which means 'who pursues this action on our Lord the King's behalf as well as his own.' See Rockwell Int'l Corp., v. United States, 549 U.S. XXXX, 127 S.Ct. 1397, 1403 n.2 (2007)
6 The United States Court of Appeals for the Third Circuit recently held that the 60-day deadline for filing a notice of appeal applied to False Claims Act, suits even when the government declines to intervene. Rodriguez v. Our Lady of Lourdes Med. Ctr., 2008 U.S. App. LEXIS 26870 (3d Cir. N.J. Dec. 30, 2008)
7 Do not confuse with Federal Acquisition Regulation (Procurement) debarment and suspension provisions in 48 CFR Part 9
8 The SAFE, ACCOUNTABLE, FLEXIBLE, EFFICIENT TRANSPORTATION EQUITY ACT: A LEGACY FOR USERS, Public Law 109-59
9 There is also a parallel but separate program for concessions at airports. 49 CFR Part 23 Participation by Disadvantaged Business Enterprises in Airport Concessions
10 And probably the law in the 8th and 6th Circuits as well