What Qualifies as a “False” Claim? Supreme Court May Clarify

Luke W. Meier and Carolyn R. Cody-Jones

Until recently, it was well-accepted that a violation of the False Claims Act (“FCA”) occurs only when there is a misrepresentation that is objectively false. Four circuits—the Fourth, Seventh, Tenth and Eleventh—had adopted this “objective falsity” standard. In March 2020, however, the Third and Ninth Circuits issued decisions departing from this view, holding that objective falsity is not required and “legal falsity” can suffice. These decisions created a stark circuit split with profound implications for government contractors, and there is now a pending petition to the Supreme Court to address and clarify the matter.

First, a refresher: The FCA does not define “false or fraudulent,” leaving courts to look to common law to interpret what constitutes a “false” claim. Many circuits had found that a representation must be objectively false to qualify as a false claim, meaning that a false claim cannot arise where there is a genuine dispute and a claim is alleged to be false based on a subjective assessment. The Third Circuit was among those endorsing this view, holding that under the FCA “a statement is ‘false’ when it is objectively untrue,” United States ex rel. Thomas v. Siemens AG, 593 F. App’x 139, 143 (3d Cir. 2014), and that “expressions of opinion, scientific judgments or statements as to conclusions which reasonable minds may differ cannot be false.” United States ex rel. Hill v. Univ. of Med. & Dentistry of N.J., 448 F. App’x 314, 316 (3d Cir. 2011). Continue reading “What Qualifies as a “False” Claim? Supreme Court May Clarify”

Proposed Rule Portends Increased Contractor BAA Obligations

Scott Arnold and Carolyn Cody-Jones

On September 14, 2020, the FAR Council published a proposed rule, Case 2019-016 “Maximizing Use of American-Made Goods, Products, and Materials,” 85 FR 56558, which proposes certain increased and new thresholds for contractors subject to the Buy American Act (“BAA”). The proposed changes implement Executive Order 13881 (July 15, 2019). There is a November 13, 2020, deadline for interested parties to submit written comments for consideration in the final rule.

The key proposed changes are as follows:

    1. Items subject to a minimum domestic component test would need to meet a new threshold of 55 percent, an increase of five percent from the current 50 percent threshold. Domestic end items and construction materials would need to be manufactured in the United States, and would need to be manufactured from components which, based on cost, are over 55 percent domestic (components mined, produced, or manufactured in the United States).
    2. A new, distinct threshold would be created for end items and construction materials that are made predominantly of iron or steel or a combination of both—meaning that the iron and steel content of the item exceeds half of the total cost of all components in the item. For such items, the domestic component content threshold would be 95 percent. In other words, for items made predominantly of iron or steel to be considered domestic, they would need to be manufactured in the United States and contain less than 5 percent non-domestic components by cost. This is a significant change; currently these items are subject to a much lower domestic content requirement—anything over 50 percent.
    3. The commercially available off-the-shelf (“COTS”) exception to the cost of component requirements would still apply to end items and construction materials that are not made predominantly of iron or steel. In other words, such COTS items would need to be mined, manufactured, or produced in the United States, but there would be no requirement that any portion of the components of such COTS items be domestic.
    4. The COTS exception to the cost of component requirements would not apply to end items and construction materials that are made predominantly of iron or steel. The rule set forth in (2) above would apply—to be considered domestic, such COTS items would need to be manufactured in the United States and contain less than five percent non-domestic components by cost.
    5. However, the rule set forth in (4) above would not apply to fasteners—hardware devices that mechanically join or affix two or more objects together—such as nuts, bolts, pins, rivets, nails, clips, and screws. Fasteners, even if made predominantly of iron or steel, would still fall within the COTS exception in (3) above, such that they only need to be manufactured in the United States. The source of components would not matter.
    6. Price evaluation adjustments made to bids for non-domestic items would increase from six percent to 20 percent (if bidder is not small) and from 12 percent to 30 percent (if bidder is a small business). For Department of Defense procurements, the existing 50 percent price evaluation adjustment applied to offers of non-domestic items would still apply.

Continue reading “Proposed Rule Portends Increased Contractor BAA Obligations”

Federal Circuit Maintains That Contractors Must Read between the Lines to Determine Expressly Unallowable Costs

Scott Arnold and Carolyn Cody-Jones

A recent Federal Circuit decision has sustained an expansive judicial reading of what constitutes an expressly unallowable cost under FAR Part 31. This decision, reached in the context of lobbying expenses, provides the potential for expansive precedent for future disputes regarding what expenses constitute expressly unallowable costs. Including expressly unallowable costs in submissions to the government can result in penalties up to two times the amount of the disallowed cost. Taking into account this decision as well as the Defense Contract Audit Agency’s (“DCAA”) expressly unallowable cost guidance released earlier this year, contractors should review their policies and procedures for identifying and excluding unallowable costs from invoices and proposals on government contracts, and consider whether to broaden their policies. Continue reading “Federal Circuit Maintains That Contractors Must Read between the Lines to Determine Expressly Unallowable Costs”

Eastern District of California Allows False Claims Act Allegations Based on Noncompliance with DoD Cybersecurity Requirements to Go Forward

Carolyn R. Cody-Jones

A recent decision in the federal district court for the Eastern District of California is one of the first to recognize application of the False Claims Act (“FCA”) to Department of Defense (“DoD”) cybersecurity requirements, and will likely encourage future lawsuits alleging noncompliance with federal cybersecurity procurement regulations. In United States ex rel. Markus v. Aerojet Rocketdyne Holdings, Inc., No. 2:15-cv-2245 WBS AC, 2019 WL 2024595 (E.D. Cal. May 8, 2019), the court denied the defendant contractor’s motion to dismiss qui tam complaint fraud allegations against the company. The complaint—brought by a former employee from the company’s cybersecurity department a month after his termination from the company—alleged the defendant fraudulently entered into DoD and National Aeronautics and Space Administration (“NASA”) contracts despite knowing that it did not meet the minimum standards required to receive the awards. The court permitted the case to move forward despite the government declining to intervene.

The primary regulations at issue in the case are DFARS 252.204-7012, which recently required, as of December 31, 2017, that contractors have a cybersecurity plan in place complying with 110 recommended security control standards set forth in NIST SP 800-171. However, the court’s decision in Aerojet Rocketdyne focused on the previous 2013 final rule and the two interim rules in 2015 implementing DFARS 252.204-7012, and also a NASA cybersecurity regulation at 48 C.F.R. § 1852.204-76 involving contractor security controls for sensitive but unclassified government information. Continue reading “Eastern District of California Allows False Claims Act Allegations Based on Noncompliance with DoD Cybersecurity Requirements to Go Forward”

Small Business Runway Extension Act Adjusts Look-back Period from Three to Five Years for Calculating Size Determinations, but SBA May Not Immediately Implement the Law

Carolyn R. Cody-Jones

The New Law

Shortly after passage by the Senate, President Trump signed the Small Business Runway Extension Act, P.L. No. 115-324, into law on December 17, 2018. The new law amends the Small Business Act to adjust the look-back period for calculating a company’s size based on average annual gross receipts from three years to five years.

Proponents of the law have lauded the assistance it will provide to growing small businesses, which in the past have been unceremoniously closed out of small business set-aside procurements before they have the resources to compete with larger government contractors. The longer look-back period benefits companies with lower revenue in prior years by allowing them to include those earlier years in calculating the company’s average annual receipts. The longer period also allows additional years of gross revenue to balance out a unique year of significant growth or income. Critics, however, worry this will hurt small businesses that must now compete with “larger” small businesses that remain eligible for small business set-aside procurements for longer. Continue reading “Small Business Runway Extension Act Adjusts Look-back Period from Three to Five Years for Calculating Size Determinations, but SBA May Not Immediately Implement the Law”

Technical Data Rights Protections Eroded by FY19 NDAA

Scott Arnold and Carolyn Cody-Jones

The Fiscal Year (“FY”) 2019 National Defense Authorization Act (“NDAA”), H.R. 5515, 115th Cong., 2d Sess. (2018), passed both chambers of Congress at breakneck speed this year, the fastest pace in approximately 20 years, and was presented to President Trump on August 3, 2018. The bill enjoyed substantial bipartisan support in both the Senate and the House. It authorizes a $717 billion national defense budget and also reforms certain practices. Continue reading “Technical Data Rights Protections Eroded by FY19 NDAA”

DFARS Cybersecurity Compliance Countdown: Are You Ready?

Justin A. Chiarodo and Carolyn Cody-Jones

It’s almost here. After years of rulemaking, covered defense contractors will soon be fully subject to heightened cybersecurity standards for covered defense information (“CDI”) on IT systems under DFARS 252.204-7012, and contractors submitting new proposals will be representing that their systems are compliant with these security requirements pursuant to DFARS 252.204-7008. We discuss in this post seven compliance tips beyond the basics that are worth revisiting during this final compliance push. Continue reading “DFARS Cybersecurity Compliance Countdown: Are You Ready?”