June 9, 2020 - False Claims Act

Materiality & the Public Disclosure Bar: Fending Off Qui Tam Attacks

FCAEnforcement activity by the U.S. Government historically spikes in the wake of heightened government spending, whether a result of wars, recessions, or natural disasters.  Following the unprecedented infusion of public money to combat COVID-19 and stabilize the economy, contractors may anticipate a similar sharp increase in enforcement activity.  A recent False Claims Act (FCA) case highlights a number of the unique issues involved in qui tam actions, including the shifting significance of government knowledge.  While government knowledge alone may not suffice to bar allegations under the public disclosure rule, the same knowledge may make the allegations immaterial if the government continues to award contract extensions.

Earlier this year, the U.S. District Court for the Southern District of New York dismissed a whistleblower’s suit alleging that AECOM engaged in improper billing and other violations while performing a $1.9 billion maintenance contract for the U.S. Army.  The district court concluded that the alleged misrepresentations were not material because the government knew of the violations and continued to make payments.  The case is a good reminder on a number of different FCA points.

In United States ex rel. Hassan Foreman v. AECOM, No. 1:16-cv-01960-LLS (April 13, 2020), relator Hassan Foreman alleged that his former employer, AECOM, falsely certified to the government in invoices and requests for reimbursement that it complied with contractual obligations and federal regulations.  Specifically, Foreman alleged that AECOM misrepresented its compliance with regulations regarding (1) its labor billing and timesheets, (2) its man-hour utilization (“MHU”) rate, (3) its management of government property, and (4) the President of AECOM’s decision to switch payroll service providers from a bank to Bluefish Global Payroll Solutions, a company with which he had a prior business relationship.  Foreman further alleged that AECOM failed to return property to the government and that AECOM terminated him in retaliation for reporting travel violations and the company’s contract with Bluefish for payroll services.

AECOM argued that the complaint should be dismissed.  First, AECOM contended that the claims related to labor billing, MHU, and government property violations were barred by the FCA’s public disclosure bar.  Second, AECOM argued the claims related to labor billing, MHU, and government property violations did not allege materiality.  Third, AECOM claimed the allegations related to the payroll services contract did not allege how the Bluefish contract violated AECOM’s obligation to make a competitive award.  Fourth, the allegations related to a failure to return government property did not identify an obligation to return property or any specific property that should have been returned.  Finally, AECOM argued the retaliation claim did not allege that Foreman engaged in protected activity or that defendants were aware of any protected activity.

Public Disclosure Bar

Under the FCA’s public disclosure bar, courts must dismiss an FCA claim if it is substantially the same allegations or transactions which were publicly disclosed in (1) a federal criminal, civil, or administrative hearing in which the Government or its agent is a party, (2) in a congressional, Government Accountability Office, or other Federal report, hearing, audit, or investigation, or (3) from the news media.  There is an exception for actions brought by the Attorney General or if the person bringing the action is an original source of the information.

Congress amended the FCA’s public disclosure bar to remove a previous provision that blocked cases whenever the government had knowledge of the allegations or transactions in the relator’s complaint.  The purpose of the amendment was to encourage private citizens to expose fraud, while also avoiding parasitic actions by opportunists who attempt to file qui tam cases based on publicly available information without adding new information to assist in the disclosure of fraud.

AECOM argued that the alleged labor billing, MHU, and property violations were publicly disclosed in government documents and communications; however, only one of the documents cited by Foreman was publicly disclosed, and the report did not disclose the material elements of the property-related fraud alleged in Foreman’s complaint.  The court determined that the publicly disclosed information in the report was not “substantially the same” as Foreman’s allegations.  Therefore, the public disclosure bar did not apply to the disclosed report.

Foreman argued that the public disclosure bar also did not apply to the remaining government documents and communications because they were not disclosed outside the government.  With the exception of the 7th Circuit, the majority of circuits require disclosure outside of the government to trigger the public disclosure bar because the government is not the same as the public domain.  If the allegations of fraud are actually disclosed to strangers of the fraud, such as innocent company employees, then the public disclosure bar is triggered.

AECOM argued that the documents were disclosed beyond the government because the documents were internally available to its employees, including Foreman.  The court, however, found it could not be determined that Foreman was an “innocent” employee or a “stranger to the fraud” when first accessing the government reports, nor whether any other AECOM employees had potential or actual access to the reports.  Therefore, it could not be determined that the public disclosure bar applied.

Materiality

Under the FCA, a misrepresentation is not actionable unless material to the government’s payment decision.  The materiality standard is demanding because the FCA is not an all-purpose antifraud statute.  To be deemed material, a misrepresentation must have a natural tendency to influence, or be capable of influencing, the payment or receipt of money or property.

Foreman alleged that AECOM’s compliance with contractual obligations and federal regulations was material to the Government’s payment decision because the government required AECOM to comply with these requirements to submit invoices.  Additionally, Foreman pointed to the compliance requirements in the DCAA Auditor’s Manual, previous enforcement actions taken by the government against another company for similar violations, and AECOM’s own documents showing that the company had sought to address the violations.

In response, AECOM argued the certifications of compliance were not material to the government’s payment decision because the government was aware of those violations but continued to make payments.

The district court cited the Supreme Court’s analysis in Universal Health Servs., Inc. v. United States, 136 S. Ct. 1989, 2003-04 (2016), that a misrepresentation is not material merely because the government designates compliance with a particular statutory, regulatory, or contractual requirement as a condition of payment.  Conversely, if the government regularly pays a claim despite knowledge that certain requirements were violated, then that is strong evidence that the requirements are not material to the government’s payment decision.

The district court concluded that Foreman’s arguments failed to demonstrate materiality.  Despite the government’s knowledge of these violations, the Army continued to make payments, repeatedly extended AECOM’s contract, and even increased funding for the contract.  Furthermore, there was no indication that the government refused to pay AECOM or demanded repayment due to the alleged labor billing, MHU, or government property violations.  Therefore, the court concluded that the requirements were not material to the government’s payment decision and dismissed the relator’s claims.

False Certifications and Rule 9(b)

Foreman alleged AECOM falsely certified (1) the contract with Bluefish was competitively awarded and (2) that the needed payroll processing services could no longer be obtain from the previous bank.  Allegedly, the Bluefish subcontract was a ‘crony’ contract because AECOM’s President had a prior business relationship with Bluefish’s owner and AECOM was Bluefish’s exclusive client for payroll processing services.  Foreman further argued that AECOM justified the switch to Bluefish by falsely stating that the bank no longer provided the needed services.

In addition to meeting the Twombly and Iqbal standard of pleading, which requires a facially plausible complaint supported with sufficient factual content to allow a reasonable inference of a defendant’s liability, qui tam complaints must meet the heightened standards of Rule 9(b) for allegations of fraudulent behavior.  Under Rule 9(b), a plaintiff is required to identify (1) specific statements alleged to be fraudulent, (2) the speaker, (3) when and where the statements were made, and (4) to explain why the statements were fraudulent.

The district court dismissed both allegations of false certification related to the Bluefish contract.  First, the allegations were insufficient to support an inference that Bluefish was not competitively selected.  Second, contrary to Foreman’s claims, a letter from the previous bank’s management showed payroll services to AECOM were terminated because the paycard program exceeded the bank’s risk tolerance.

Conversion of Government Property

Foreman alleged AECOM violated the FCA’s conversion provision because AECOM generally failed to properly account for and return excess parts or recoverable items.  Specifically, Foreman cited to internal AECOM memoranda that mentioned “SUPER BAD” failures to return recoverable items like “tire example 6k,” and stated that failures to properly credit the government caused “significant liability.”

Anyone who has possession, custody, or control of government property or money and knowingly delivers, or causes to be delivered, less than all such property or money may face civil penalties.  The court, however, dismissed the conversion claims because Foreman’s allegations did not identify any specific excess or recoverable items that AECOM possessed but failed to return to the government, and therefore failed to make a prima facie case for fraudulent conversion.

Relatedly, Foreman alleged AECOM committed a reverse false claim by wrongfully withholding money owed to the government, rather than wrongfully seeking payments from the government.  To succeed on a reverse false claim, a plaintiff must show that the defendant made a false record or statement at a time that the defendant had a duty to pay money or property to the government.

Foreman argued that reverse false claims apply to the knowing and intentional retention of funds even in the absence of notice to the government.  The court disagreed, finding such a broad sweep “a sweep too far” and dismissed the reverse false claim for failure to identify a separate obligation to return overpayments or excess property.

Retaliation

AECOM terminated Foreman shortly after he informed AECOM management he intended to report travel violations and the Bluefish contract issues outside the company.  Foreman alleged his termination violated FCA’s anti-retaliation provision because he received a positive performance review immediately prior to his internal reporting of travel violations.  To demonstrate a violation of the anti-retaliation provision, a plaintiff must show (1) the plaintiff engaged in conduct protected under the statute, (2) the defendants were aware of the conduct, and (3) that the plaintiff was terminated in retaliation for the conduct.

The district court determined Foreman’s travel violation complaint was not protected under the FCA because it alleged individual employees violated federal regulations and company policy, not that the employer, AECOM, engaged in fraudulent conduct.  Therefore, Foreman’s actions were not reasonably directed at exposing fraud committed by AECOM upon the government.  Relating to the Bluefish contract issues, Foreman did not allege that anyone at AECOM knew of his complaint, which he made to the Inspector General’s office, and therefore he failed to adequately plead that AECOM knew of the protected conduct.  The district court dismissed the retaliation claims for failure to plead sufficient facts for reasonable inference of liability.

Takeaways:

As the Government begins enforcement actions in the wake of the Coronavirus Pandemic, and the liberal public spending that ensued, contractors and relators should be aware that, while other consequences may apply, not all misrepresentations about compliance with a statutory, regulatory, or contractual requirement are actionable under the FCA.  Defenses to qui tam complaints include the public disclosure bar, immateriality, the heightened pleading standard of Rule 9(b) (pleading with specificity), and failure to make a prima facie case (not pleading sufficient facts for reasonable inference of liability).  As AECOM illustrates, where one line of defense fails, another may succeed.

  1. Significance of Government Knowledge to Materiality and the Public Disclosure Bar

In particular, AECOM highlights the shifting significance of what the government knows in determining what defenses apply in a qui tam suitWhere the court determined the public disclosure bar did not apply because none of the relevant government documents and communications qualified as “public,” the same governmental knowledge, coupled with the course of performance, made the plaintiff’s allegations immaterial.

 Under the public disclosure bar, courts must dismiss FCA claims if the material elements of the alleged fraud have previously been disclosed beyond the Government, unless the action is brought by either the Attorney General or an original source.

Materiality may serve as a countervailing defense when the government possesses knowledge of the alleged wrongdoing, but that information is not yet public.  To be actionable under the FCA, a claim must involve a false representation that is material to the government’s payment decision.  The materiality requirement is a high bar, and if the government is aware of violations but continues to pay, the misrepresentations are unlikely to be found material.

In this case, the defendant argued that the alleged violations were publicly disclosed in government documents and communications.  The court disagreed and found that none of what AECOM said were public disclosures actually qualified as “public,” especially under the amendment that clarified government knowledge alone is not public.  But that same government knowledge, along with continued payment to the contractor, was sufficient to conclude that the violations were not material.  In sum, because the information was not publicly disclosed, the public disclosure bar did not apply.  Instead, the defendant successfully challenged the materiality of the alleged violations based on government knowledge.

  1. Pleading with Particularity

As a species of fraud claims, qui tam complaints must meet the heightened standards of Rule 9(b), which requires pleading with particularity.  If a plaintiff is unable to identify (1) specific statements alleged to be fraudulent, (2) the speaker, (3) when and where the statements were made, and (4) to explain why the statements were fraudulent, a court should dismiss the case as a matter of law.

A relator, like all plaintiffs, carries the burden of proof and must plead sufficient facts to support a reasonable inference of liability.  If the relator fails to allege facts adequate to support each element of a prima facie violation, a court should dismiss the case as a matter of law.

  1. Retaliation Claims

Finally, while firing an employee always raises the risk of a retaliation claim, an employee is not automatically shielded by the FCA’s anti-retaliation provision simply because they filed a complaint.  To trigger anti-retaliation protections under the FCA, an employee’s complaint must be reasonably directed at exposing an employer’s fraud against the government; alleging actions by individual employees contrary to both company policy and the law does not suffice.  Furthermore, an employer must be aware the employee made the complaint, or they cannot be held to act in retaliation.

If anti-corruption and anti-fraud enforcement spikes in the wake of COVID-19, as it historically has following periods of heighten federal spending, then knowing the ins and outs of the False Claims Act may prove essential in mounting a successful defense against qui tam complaints or other allegations of corporate wrongdoing.  Morrison & Foerster’s Alex Ward and Rachael Plymale presented a webinar titled” Effective Internal Investigations and Disclosures,” that discussed managing False Claims Act issues. A recording of the webinar, which is part of our group’s Remote Learning Series, is available here.