How a Civil War-era law could cost government contractors millions

The price of defrauding the government could get a lot costlier.

A recent court decision by the Fourth Circuit, whose jurisdiction includes Maryland and parts of Virginia, is set to change how much contractors who mislead the government face in potential penalties.

If widely adopted, the court’s decision could quickly multiply the fine a misbehaving contractor incurs based on the number of invoices it files during the course of a contract — even if the government has not suffered any damages or even if the invoices are accurate.

Under the False Claims Act — a Civil War-era law that was designed to protect the government from receiving false goods and services from contractors — the penalty imposed on each invoice that a contractor submits while engaging in fraud can range from $5,000 to $11,000. Multiplying that by the thousands of invoices that some contracts generate can easily escalate that figure into millions of dollars.

In addition, under the False Claims Act, a private citizen can file a suit on the government’s behalf if he or she has first-hand knowledge of fraud. Based on whether the government decides to pursue the case or not, the individual’s share of the penalty amount can range from 15 to 30 percent of the total award.

That potential windfall acts as a strong incentive for people to file suits on behalf of the government, said Susan Cassidy, a partner at law firm Covington & Burling, which is petitioning the Supreme Court to review the Fourth Circuit’s decision. The petition is also backed by the National Defense Industrial Association.

“Even if a company had a good defense, [the court’s decision] makes the potential damages so vast that you will settle,” Cassidy said.

The case that the Fourth Circuit ruled on involved a Belgian shipping company, Gosselin, which was accused of conspiring to fix shipping rates to transport goods to troops based in Europe and of providing a false certification of independent pricing when it bid the contract. The court awarded penalties by ruling that each invoice Gosselin submitted was considered a false claim, even though the invoices themselves were accurate.

One of the original intents of the False Claims Act was to encourage whistleblowers. Technically, a contractor can be prosecuted only if it knowingly commits fraud, and cases are routinely rejected by the government. But the total number of fraud suits filed by private citizens has increased in recent years, according to statistics compiled by the Justice Department. From 2007 to 2013, the number of such suits increased by 106 percent.

“One factor that may be motivating more whistleblowers to file complaints is the Justice Department’s success in False Claims Act cases,” Nicole Navas, a department spokeswoman, said in an e-mail. Since 2009, the department has recovered more than $20.2 billion under the False Claims Act, Navas said.

Attorneys for contractors say the majority of cases brought forth are usually by disgruntled former employees. Company executives usually don’t worry about such suits, but compliance lawyers do.

“We talk about it as a ‘bounty hunter’ provision,” said Alan Chvotkin, executive vice-president and counsel for the Professional Services Council, which is not part of the Supreme Court petition. “As the dollar value of contracts has increased, the financial incentive to [private citizens] goes up as well,” he said.

Of course, the best way to avoid any of these problems is for a contractor to conduct business honestly. But that may not be so easy, Chvotkin said.

“As the complexity of contracts has grown, the chance of error also increases,” he said. “I have no doubt that contracts have mistakes, but whether that rises to illegality” is for the courts to define, he said.

For now, the Supreme Court has yet to decide whether it will take up the issue.

Amrita Jayakumar covers federal government contracting for Capital Business, The Post's local business publication.
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