What Constitutes a False Claims Act Violation?

What kinds of schemes to cheat the Government does the False Claims Act cover?

The False Claims Act covers a wide variety of schemes to cheat the Government, including:

a. Labor hours mischarging.
b. Charging for services not rendered or not medically needed.
c. Product or service substitution.
d. Lack of compliance with contract specifications.
e. False negotiation/defective pricing in violation of the Truth in Negotiations Act.
f.  Kickback schemes.
g. Health care fraud.
h. Upcoding or upcharging in the health care field.
i.  False cost reporting.
j.  Grant or other program fraud.
k. Underpayment of money, like royalties, customs duties, etc., owed to the Government.

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Are particular types of cases frequently brought under the False Claims Act?

Generally, there are three broad categories of cases that can be addressed by the False Claims Act:

1. False statements and certifications in the course of the Government "procuring" or buying goods and services, particularly defense-related procurements;
2. Medicare and Medicaid violations and false claims, including billing for services not rendered, overcharging for services, kickbacks, and improper cost reporting schemes; and
3. Other types of cheating the Government, such as grant and loan fraud to obtain Government funds and false statements to avoid paying monies owed to the Government, as in "reverse false claims"  brought under 31 U.S.C. § 3729(a)(1)(G).

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Are there specific provisions in the False Claims Act that state what it prohibits?

Yes—but not in the manner that you might think. That is, the Act does not say that it is illegal, for example, to provide faulty brakes for an Army jeep. Instead, the False Claims Act is much more general.  Its provisions make it illegal for any "person" to:

1. Knowingly present or cause to be presented to the United States a false or fraudulent claim for payment or approval (31 U.S.C. § 3729(a)(1)(A));
2. Knowingly make, use, or cause to be made or used a false record or statement to get a false or fraudulent claim paid or approved (31 U.S.C. § 3729(a)(1)(B));
3. Conspire to defraud the United States by getting a false or fraudulent claim allowed or paid (31 U.S.C. § 3729(a)(1)(C));
4. Intend to defraud the Government or to conceal property or money in his possession or control, deliver or cause to be delivered less property or money than the amount reflected on the receipt (31 U.S.C. § 3729(a)(1)(D));
5. Intend to defraud the Government, make or deliver a receipt without knowing that the information on the receipt is true (31 U.S.C. §3729(a)(1)(E));
6. Knowingly buy property from a Government employee who lawfully may not sell such property (31 U.S.C. § 3729(a)(1)(F)); or
7. Knowingly make, use or cause to be made or used a false record or statement to conceal, avoid, or decrease an obligation to pay money or property to the Government (31 U.S.C. § 3729(a)(1)(G)).

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What is a “false claim?

The False Claims Act is intended to cover "every variety of false or misleading claim made against the Government." No specific false statement is required for a false claim to exist and the law to be violated. A simple denial of wrongdoing is enough.

A contractor who knowingly fails to fulfill a requirement of its Government contract, but who seeks payment as if it had fully performed the contract without disclosing that it did not comply with the contract terms, has presented a false claim.

A contractor's demand for payment implicitly represents compliance with contract terms, even though the bill to the Government neither recites that the contract terms have been fulfilled, nor provides any other representations as to quality.

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Does the False Claims Act also cover situations where the defendant owes the Government money?

Yes. The "reverse" False Claims Act provision in 31 U.S.C. § 3729 (a)(1)(G) [formerly 31 U.S.C. § 3729 (a)(7)] makes it illegal for a defendant to misrepresent  facts to avoid paying an "obligation" owed the Government. With a few notable exceptions, most courts have strictly limited (a)(1)(G)’s applicability to incidents where the obligation concealed, avoided, or decreased was a current, immediate legal obligation to pay money owed, such as in a contract, judgment, or acknowledgment of indebtedness. The Department of Justice has also discouraged pursuit of cases involving innovative interpretations of this provision and, thus, most reverse False Claims relators must work hard to obtain a recovery.

For example, a violation of the “reverse false claims” provision occurred where defendants failed to record, in tow boat logs, illegally discharged pollutants. The defendants’ policy was to record legal discharges, but not illegal ones. Reverse false claims existed because the defendants did not disclose to the Government their dumping of wastes and chemicals into the waterways, thus concealing or avoiding their obligation to pay cleanup costs for Clean Water Act violations. These cases involved Government contractors who supplied jet fuel for the Air Force, and whose contracts included standard Clean Water Act and other environmental compliance clauses.

Another example of the  reverse False Claims Act provision involves oil companies understating the royalties they owed to the Government for oil pumped from federal lands.

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What about conspiracies among companies or individuals? How does the False Claims Act address them?

Conspiracies are liable under the False Claims Act if the co-conspirators try to defraud the Government by getting a false or fraudulent claim approved or paid.

A conspiracy in violation of 31 U.S.C. §3729 (a)(1)(C) requires proof that: (1) the defendant conspired with one or more persons to get a false or fraudulent claim allowed or paid; and (2) the conspirator(s) performed any act to effect the object of the conspiracy.

In his treatise on the law, False Claims Act defense lawyer Jack Boese admits that some kinds of wrongdoing are almost automatic violations of the False Claims Act’s prohibitions against conspiracies: "Bid rigging, like some other actions involving false bidding or negotiations, such as collusive bidding and kickbacks, almost by definition involves conspiracies."

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Are there any False Claims Act provisions that are less commonly used in qui tam cases?

Yes. For example, 31 U.S.C. § 3729(a)(1)(D)  makes it unlawful to deliver less property or money to the Government than the amount set forth in the receipt. Additionally, the provisions of 31 U.S.C. §3729(a)(1)(E) apply where the Government is given a false receipt for goods, such as where the receipt indicates that 100 muskets were sold to the Army, when in fact the box actually contained only 2 of the guns. Finally, 31 U.S.C. § 3729(a)(1)(F) applies when a Government employee sells Government property without proper authority to do so, which may occur in circumstances where the employee personally pockets the payment received.

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Does the False Claims Act apply to violations of the Internal Revenue Code?

No.  The False Claims Act does not apply to false statements or documents made in connection with dealings with the Internal Revenue Service (IRS), such as statements made in a tax return.

There is a separate whistleblower claims process for IRS whistleblowers. It operates similarly to the federal False Claims Act and provides for a substantial reward for successful IRS whistleblowers. The largest reward to date to an IRS whistleblower is $ 104 million.

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In what kinds of businesses or industries can illegal kickbacks occur?

Many. Kickbacks are commonly seen, however, in healthcare and in the defense industry, particularly by subcontractors of the prime contractor. These kickbacks may take the form of consumer goods, cash, or agreements to refer all future clients or patients. In one case, the subcontractor who subcontracted with another subcontractor received a lovely new set of dining room furniture for his home as a kickback.

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What kinds of cases involve charging for services not rendered?

Much like labor hours mischarging cases, charging for services not rendered is a frequently-encountered scheme. Charging time for quality checks or reviews when none occurred is one example.  Another would be in the health care field, where the Government is charged for services not actually provided to a patient.  The services may also be charged as if performed by a medical doctor when, in fact, a nurse, resident, intern, or other employee provided the service, so the service should have been charged at a lower rate or not charged to the Government at all.

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What kinds of False Claims Act violations occur with Government grants?

A lot of Government funds are spent on research grants, and false statements or false research reports can trigger False Claims Act liability. However, the Department of Justice does not frequently pursue these cases because of a lack of interest in prosecuting such fraud by the contracting agency.

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What are general indicators of a labor hours mischarging case?

This common scheme to cheat the Government can occur in the manufacturing setting or in a contract involving personal services provided to the Government. In a typical False Claims Act case, the Government pays for employee labor hours that were either not actually worked or which were worked, but not on the contract for which the Government was billed. Sometimes the original time records are accurate, but they are then changed to falsely reflect work being performed on another contract. Alternatively, the original time records may falsely inflate the number of hours actually worked, as where non-billable administrative time (as in time spent giving blood, making deposits at the company credit union, training on new machines, or handling union grievance matters) is instead charged as if the time was actually spent working to make a product for the Government.

Quite often, other company records will show that the labor hours are false. For example, if a critical machine was required to perform the Government work, but that machine was off-site being  repaired during the weeks for which time was charged, it can be shown that the labor hours were false. Alternatively, if an entire department's time is charged to a particular Government job but that department produced 2,000 products that week for a non-government job, the charges to the Government can be shown to be false.

Sometimes schemes to charge time to the wrong contract are called “cross-charging” because charges on one contract are charged to another and charges on a third contract are charged to still another contract. In many mischarging cases, companies that do a lot of business with the Government may have dozens of contracts and many subcontracts, with a variety of governmental agencies, foreign entities, and private companies. There may be all sorts of internal company pressure to reduce time spent on one contract that is “over-budget,” while charging time to another contract that is “under-budget.” However, many times the “under-budget” contract may be a “cost-plus” or other type of contract where the Government pays for virtually each hour charged to the contract. The “overbudget” contract may be a “fixed price” contract, often a private sector contract, where the company gets paid the same price for the products produced, regardless of the amount of time spent on the work.

A labor hours mischarging case is frequently discovered or reported by clerical workers and production workers, or their immediate supervisors, who are required by higher-level company officials to falsely record time or to falsify accurate time records of co-workers. The actual architects of the scheme could be anyone from low-level supervisors upwards to those in the executive offices in far-away company headquarters.

To make matters worse, the Government allows contractors to use the historical or “experiential” data from prior Government work to help set the proper number of hours, overhead, “indirect costs,” and allowable profit for future Government contracts. Where a lot of mischarging has occurred, this data, used for cost and pricing determinations by the Government, is also false.

Whatever the details of the scheme, the result is the same since the Government simply should not be charged for work not done on a specific contract and should not be charged for work done for private parties.

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