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U.S. Supreme Court Clarifies Proof Needed to Impose False Claims Act Liability on Subcontractors
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August 25, 2008
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Thelen LLP
The U.S. Navy contracted in 1985 with two shipbuilders to build a fleet of guided missile destroyers according to the Navy’s baseline drawings and military standards. The shipyards contracted with Allison Engine Co., Inc. to build the generator sets that supply electrical power to the destroyers. Allison Engine subcontracted with the General Tool Co. to assemble the generator sets. General Tool subcontracted with Southern Ohio Fabricators, Inc. to manufacture bases and enclosures for the generator sets.
The Navy drawings and standards were incorporated into each subcontract. Each of the subcontracts required that each delivered generator sets be accompanied by a certificate of conformance certifying that it had been manufactured in accordance with Navy requirements.
The Navy paid the shipyards $1 billion for each new destroyer built. Of that, Allison Engine received approximately $3 million for each generator set it produced, General Tool received approximately $800,000 for assembly of each generator set, and Southern Ohio Fabricators received more than $100,000 for the base and enclosure manufactured for each generator set. Allison Engine, General Tool and Southern Ohio Fabricators all were paid with funds that ultimately came from the U.S. Treasury.
Two former employees of General Tool filed a qui tam suit against the subcontractors alleging violation of the False Claims Act, 31 USC §3729. The False Claims Act renders liable anyone who:
|  | Knowingly presents or causes to be presented a false or fraudulent claim for payment or approval to an officer or employee of the United States. 31 USC §3729(a)(1).
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| | Knowingly makes or uses a false record or statement to get a false or fraudulent claim paid for or approved by the federal government. 31 USC §3729(a)(2).
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| | Conspires to defraud the federal government by getting a false or fraudulent claim allowed or paid. 31 USC §3729(a)(3).
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The complaint alleged that the subcontractors submitted invoices to the shipyards fraudulently seeking payment for work that had not been done in accordance with contract specifications. The plaintiffs alleged that certain of the generator sets were defective and leaked oil; had not received required final quality inspections; and had been welded by welders who did not meet military standards. They also alleged that the subcontractors had issued certificates of conformance falsely claiming that the generator sets had been built to specification even though the subcontractors knew this was not true.
At trial, the plaintiffs failed to introduce the invoices that the shipyards presented to the Navy. The subcontractors moved for judgment as a matter of law, asserting that without the invoices, there was no proof that any false or fraudulent claim had been presented to the federal government. The plaintiffs argued that they did not need to prove that a fraudulent claim had been submitted to the Navy because the plaintiffs already had proved that federal government funds had been used to pay the invoices. The U.S. District Court rejected the plaintiffs’ argument and ruled in favor of the subcontractors.
On appeal, the U.S. Court of Appeals for the 6th Circuit reversed the District Court. The 6th Circuit agreed that 31 USC §3729(a)(1) requires proof that the false claim was presented to the federal government. However, it held that claims under 31 USC §§3729(a)(2) and (a)(3) do not require proof of an intent to cause a false claim to be paid by the federal government. Rather, it held that proof of an intent to cause a false claim to be paid by a private entity using federal government funds was sufficient.
The U.S. Supreme Court granted certiorari in order to interpret whether: (1) 31 USC §§3729(a)(2) and (a)(3) require proof that that the defendant intended to defraud the federal government; and (2) proof that the false claim resulted in payment using federal government funds is enough to impose liability. It reversed and remanded. Allison Engine Co., Inc. v. U.S. ex rel. Sanders, No. 07-214; 2008 WL 2329722 (2008).
The Supreme Court read the phrase “to get” in 31 USC §§3729(a)(2) to connote “purpose.” Similarly, it concluded that the term “getting” in 31 USC §3729(a)(3) indicated that defrauding of the federal government must be purposeful. The Supreme Court wrote that eliminating a requirement of intent would unduly expand false claims liability, making it “almost boundless.”
The court also held that it was insufficient to merely show that government funds were used to pay a false or fraudulent claim. Otherwise, the court wrote, any false claim made to a university, for example, would be actionable so long as the university received some federal grants. Rather, the Supreme Court wrote:
What §3729(a)(2) demands is not proof that the defendant caused a false record or statement to be presented or submitted to the [federal] Government but that the defendant made a false record or statement for the purpose of getting “a false or fraudulent claim paid or approved by the Government.” Therefore, a subcontractor violates §3729(a)(2) if the subcontractor submits a false statement to the prime contractor intending for the statement to be used by the prime contractor to get the Government to pay its claim. If a subcontractor or another defendant makes a false statement to a private entity and does not intend the Government to rely on that false statement as a condition of payment, the statement is not made with the purpose of inducing payment of a false claim “by the Government.” In such a situation, the direct link between the false statement and the Government's decision to pay or approve a false claim is too attenuated to establish liability.
The Supreme Court wrote that its interpretation of 31 USC §3729(a)(3) was similar to its interpretation of (a)(2):
[I]t is not enough for a plaintiff to show that the alleged conspirators agreed upon a fraud scheme that had the effect of causing a private entity to make payments using money obtained from the Government . Instead, it must be shown that the conspirators intended “to defraud the Government….” It is not necessary to show that the conspirators intended the false record or statement to be presented directly to the Government, but it must be established that they agreed that the false record or statement would have a material effect on the Government's decision to pay the false or fraudulent claim.
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For more information about the issues covered in this report, please contact Paul Berning in our San Francisco office at 415-369-7229 or at pwberning@thelen.com or contact your Thelen attorney. For more information about Thelen’s Construction and Government Contracts Department, click here.
©2008 Thelen LLP
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