by John P. McGill
If you work on public projects then you are likely aware of the False Claim Act and what it means; for those of you who do public works but don’t know this law, you should. The California False Claim Act (CFCA) is modeled on the Federal False Claim Act (FCA), which has been around since the Civil War. Both the FCA and the CFCA are used to penalize contractors that over bill the government for work they perform. The FCA has been used against contractors in Iraq and Afghanistan, sometimes effectively, sometimes not so much.
On the State level however, and with contractors that are not in the same league as say, Halliburton, the state can wield a pretty hefty hammer. The hammer just got a bit heavier too following the decision in San Francisco USD v First Student Inc. The First Student case is not a construction case but you can bet it will catch the attention of attorneys that represent public agencies and they will be looking to apply the ruling to construction matters.
First Student was a bus company that had a contract with the San Francisco Unified School District. Under the contract, First Student was required to meet a number of specific safety requirements and to conduct a number of different safety inspections for their buses. The inspections included periodic maintenance as well as daily/weekly visual inspections. First Student also had an obligation to report to the SF USD that it was in compliance as part of its contractual obligations, but the reporting requirement was not a condition for payment.
First Student billed the SFUSD on a regular basis and SFUSD paid First Student based on those billings. This is where the problems started. Apparently, First Student was not doing the proper maintenance and not all of the buses it used were in compliance with the maintenance requirements.
The State Attorney General (AG) and SFUSD did not sue First Student however; instead a nonprofit filed the action. The qui tam (pron. Key Tam) plaintiff/relator filed an action against First Student on behalf of the SFUSD claiming that First Student was submitting false claims for payment because it knew that its buses were not being properly maintained. The allegations were that the bus company was knowingly sending out buses that were below the required standards in the contract. The relator presented its evidence to the SFUSD and to the State AG but the AG and SFUSD declined to file any lawsuit. SFUSD however continued to pay First Student notwithstanding the allegations.
The relator sued on behalf of the SFUSD. The trial court dismissed the case the first time but the Court of Appeals reversed. First Student then moved for summary judgment, the trial court granted the motion and the matter again went up on appeal. That is the case that you need to be aware of because the Court’s ruling makes it easier to bring an action against a contractor. This can be a profitable endeavor too; the relator shares in the recovery and also gets attorney fees paid.
First, according to the First Student court, even though the payment requests sent by the bus company did not certify compliance with the contract and even though the contract between the two parties did not require any certification of compliance with the contract, the court found that the payment applications were nevertheless "claims". The court held that pay applications "included an implied certification of compliance with contractual requirements that if false, would form the basis for a CFCA action." According to the Court, the pay app is an effort to obtain payment and the request implies the contractor satisfied the requirements in the contract.
The court then looked at whether the implied certification was material to the public agencies decision to pay the invoice. If the public agency's decision to pay is not influenced by what the contractor submits, then it is not material. In this case, the court determined that the implied certification of compliance was material to the District's decision to pay. This is where it gets muddied up.
Recall, SFUSD knew about the alleged noncompliance with the regulations because the relator informed it of the violations. The facts also stated that First Student denied those allegations. The Court of Appeals wrote that if SFUSD actually knew that First Student was not in compliance but still paid, then the materiality condition would not be satisfied. The court acknowledged that SFUSD knew of the allegations but then distinguished the knowledge of the allegation of the wrongdoing from actual knowledge of wrongdoing.
Evidently the fact that SFUSD did not investigate but instead continued to pay First Student was not sufficient to eliminate the materiality requirement. The court stated that materiality "focuses on the potential effect of the false statement when it is made, not on the actual effect of the false statement when it is discovered.” According to the court if the violation of the CFCA is complete with the submission of a false claim for payment, the government’s actual response cannot be dispositive of the issue of materiality. In other words, if you bill for it and if you are not compliant with your contract provisions, then you are in violation of the CFCA. (You don’t even need to be paid; it’s the fact that you tried that makes it a violation.)
This is an odd kind of logic. According to this court, even if the public owner suspects that the contractor may be in violation of a contract provision but pays anyway, there is a violation if the contractor bills for work and is in breach of some condition of the contract. Apparently the Owner does not need to do any investigation because the implied certification of the pay app is what triggers the violation if there is some lack of compliance.
Finally, there is a requirement that the contractor act knowingly, which means the contractor has actual knowledge, acts in deliberate ignorance of the truth or falsity of the information, or acts in reckless disregard of the truth or falsity. All of this suggests that the contractor understands that the work is not compliant with the requirements of the contract.
The issue of noncompliance no longer seems to involve the contractor at all. Instead the critical issue for future litigation will be whether the public owner can find some contractual term that the contractor did not meet. According to First Student, if there is a pay application, then there is an implied certification that the contractual terms have been met. After that, the materiality determination arises, and as the court wrote “if a false statement was clearly material when it was made, the fact that the contracting entity did not treat the falsity as material upon discovering it would not preclude a claim under the CFCA”. In other words, if the Owner pays, the pay app was material and any violation of the contract lays open the possible CFCA violation.
First Student limited to its facts is not difficult to reconcile with the decision: the company was not maintaining buses that were used to pick up school children. What is troubling is the way the court wrote in such broad terms and with such an effort to justify the expanded interpretation of the CFCA. Don’t be surprised to see a CFCA violation raised if you get into a dispute on a public works project; if nothing else, it gives the Owner leverage against any claim(s) you may have.
Bio: John P. McGill is an attorney and represents contractors and suppliers throughout the Bay Area and Northern California in both private and public work disputes and in employment, transactional, and administrative matters. He received his JD with distinction from the University of the Pacific, McGeorge School of Law, and is a member of the Traynor Honor Society. He is the author of California Contractor’s DESKTOP GENERAL COUNSEL What You Need To Know About California Construction Law. Contact: Work - 925-952 5403 Cell- 707 337 1932 Email johnmcgill310@gmail.com