by John McGill, Attorney, Archer Norris
The Federal False Claim Act has been around for awhile; since the Civil War in fact. Its purpose then, and its purpose now, is to be a significant disincentive to contractors that are thinking about bilking the government out of money. Whether it has been effective or not is still an open question because, for one thing, it requires the government to take action when it believes there is an overcharge. On the grand scale of war profiteering, the government seems to look the other way, at least until that time when it cannot avoid the obvious. In the more mundane world of public contracting, when the government can exercise its clout with some authority, there is still not much prosecution under the Act, but there are certainly a lot of threats of prosecution.
California has its own version of the FCA and much of what is included in the CFCA is similar to, although not entirely the same as, the Federal FCA. In fact California looks to the Federal courts for guidance when applying the CFCA and so what is good for the Federal goose is often good for the California gander. The CFCA like its Federal counterpart is intended to dissuade contractors from turning in bills that are either exaggerated amounts or are simply fabrications. It does this by imposing some fairly stiff penalties if a violation is proved. The government can recover three times the claim amount as damages, plus costs and a penalty of $ 10,000 for each false claim. A violation can also result in debarment and that can have a very long term effect.
A false claim under either the Federal or California statutes includes the same elements to establish the cause of action. There has to be a false or fraudulent claim, that was material to the decision making process of the governing agency, that the defendant contractor presented or caused to be presented to the government for payment, and with knowledge that the claim was false or fraudulent.
In a recent Federal case, Hooper v Lockheed Martin Corp, the FCA was expanded in its application. There the court ruled that estimates can give rise to liability under the FCA. If the contractor knows that the bid that is submitted is not sufficient to cover the costs of the project, but the contractor submits it anyway so that it can get the job and then (presumably) take advantage of change orders to fill in the missing funding, this can give rise to a false claim. The court analogized it to a fraud in the inducement theory where the government is mislead into a contract and therefore all further acts that take advantage of that inducement can be false claims. In other words, if you deliberately underbid the project and then submit change orders that are intended to recoup the underbid amount, then that is a false claim.
The Lockheed case involved a bid on software and hardware that was going to be used to support space launch operations. The government laid out six criteria that it would use to evaluate bids, one of which was the cost. The government reserved the right to take the best value and not simply the lowest bid. Lockheed did not submit the lowest bid but it was determined to be the best value. There was evidence presented that Lockheed knew the project could not be completed for the bid price but submitted the bid anyway. Notwithstanding the evidence, the District Court dismissed the action on summary judgment because it found that an estimate could not create false claim liability.
The Court of Appeals reversed and held that in fact estimates can give rise to false claim liability. It is not the estimate though that creates the liability; it is the billings that follow from the estimates that are the false claims, especially the change order billings that are submitted that are intended to make up the shortfall. While not a construction case, don’t be surprised if creative lawyers find a way to apply it to construction projects; they have tried before to make this argument, they will try again.
The Federal Courts have also held that collusion between contractors before a bid is submitted can also constitute a False Claim. In United States v Hess, a group of electrical contractors got together and conspired to rig bids that were submitted on public works projects. The contractors would first average their bids then agree amongst themselves who would submit the “average” bid and all of the others would submit higher bids. The court ruled that the billings that followed from this fraudulent activity were false claims because they derived from the fraudulent activity of the bid rigging. Again, it was a fraud in the inducement type of legal theory.
So why would a public agency take such a low bid in the first place? The short answer is they might have to. For example, under the California Public Contract Code, the lowest responsible bidder is awarded the contract. If the bidder is deemed responsible (has all of the necessary qualifications and experience) and the bid is responsive (has all the necessary elements) then the public owner has no alternative but to accept the bid. The public contractor is also expected to post a performance bond in the event there is a default. The Government is protected from the default of the contractor in the event the low bid proves to be too low, but it is not necessarily protected from the contractor’s efforts to manipulate the project billing after the project is awarded. That’s where the False Claim Act can now come into play.
There are other ways the CFCA can be triggered. California courts have determined that change order proposals are not false claims because they are not intended to induce any payment from the public agency. The proposal is the contractual requirement that precedes the owner’s approval of the change order. However, once that change order proposal is approved and is billed to the owner, then it can become a false claim if the amount billed is excessive or fraudulent.
Representations in catalogues or other sales materials that are not true can also lead to False Claim liability. In City of Pomona v. Superior Court, a manufacturer of pipe represented in its sales materials that the pipe it sold had certain percentages of various metals when in fact the pipe did not meet those specifications. The City of Pomona had dealt with this particular manufacturer for years under the mistaken belief that the pipe it was buying met the standard that was specified. It didn’t and the City sued under CFCA. How that case turned out is not available, but the point to be taken from this is that if you advertise that your product meets a particular standard, and that standard is relied on by the public agency to award you the contract, then that product had better be up to that standard or there is a violation.
Bottom line: If you are working in the public arena you need to be aware of the False Claim Act. It is there for a purpose and that purpose is to discourage unscrupulous contractors from overcharging for their work. It is not something to take lightly and it is a nasty piece of business if you get caught up with it. In a word, DON’T! As they say, a word to the wise is sufficient.
Bio: John McGill is the author of California Contractor’s DESKTOP GENERAL COUNSEL What You Need To Know About California Construction Law (M3-Publisher 2012). He is an attorney representing contractors in contract, claims, Stop Notice, Liens, and employment litigation and in transactional matters. Contact him at jmcgill@archernorris.com or johnpmcgill@sbcglobsal.net ; office - 925-952 5403 or cell- 707- 337-1932.
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