Merle M. DeLancey Jr. and Craig Stetson*
This is the first in a series of blog posts concerning the audits and investigations related to the contracts and grants awarded, and relief funds provided, in response to the COVID-19 pandemic. As of February 2021, pursuant to the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”), which created the Paycheck Protection Program (“PPP”) and supplemental funding such as the Families First Coronavirus Response Act, the United States government has made available an estimated four trillion dollars in relief funds to businesses and individuals, and the Biden administration is proposing roughly two trillion dollars more.
In addition to the relief funds, the Government has easily awarded more than billions in pandemic-related contracts for everything from vaccines to PPE to hand sanitizers. These levels of funding and spending are unprecedented and have been made at breakneck speed (for the government). Based on these factors and lessons from the past, audits of relief recipients and contractors to confirm appropriate use of government funds are inevitable. And the government has said as much. Of course, if an audit reveals potential wrongdoing or malfeasance, relief recipients and contractors should expect follow-on investigations and enforcement activity.
This first post identifies the myriad of entities that are or will be reviewing—and potentially investigating—relief recipient and contractor representations made to obtain, and subsequent use of, government funds.
Continue reading “COVID Audits and Investigations: The Enforcers”
Luke W. Meier and Robyn N. Burrows
Last week, the Government Accountability Office (“GAO”) issued a report on Department of Energy (“DOE”) contracting, Improvements Needed to Ensure DOE Assesses Its Full Range of Contracting Fraud Risks. The thrust of the report is that DOE should do more to prevent and detect fraud, particularly in less-examined areas such as bid-rigging, misrepresentation of eligibility, kickbacks and gratuities, and conflicts of interest.
DOE relies on contractors to carry out its missions at laboratories and other facilities, spending approximately 80 percent of its $41 billion in total obligations on contracts. In March 2017, GAO reviewed DOE’s approach to managing its risk of fraud and found DOE did not use leading practices, resulting in missed opportunities to mitigate the likelihood and impact of fraud.
Continue reading “GAO Report Suggests DOE Should Identify More Instances of Contractor Fraud”
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”
Sara N. Gerber
The Seventh Circuit’s recent decision in U.S. ex rel. CIMZNHCA, LLC v. UCB, Inc. widens the Circuit split on the standard of review applicable when the government seeks to dismiss a qui tam case under the False Claims Act (“FCA”). The FCA, 31 U.S.C. § 3730(c)(2)(A), provides that the government may dismiss a qui tam case without the relator’s consent if the relator is given notice and an opportunity to be heard. Although the Department of Justice (“DOJ”) has increasingly exercised its dismissal authority since issuance of the “Granston Memo” in January 2018—which encouraged DOJ attorneys to consider seeking dismissal if in the best interests of the government—as the Seventh Circuit noted, the FCA does not indicate “how, if at all,” courts are “to review the government’s decision to dismiss.” Circuit Courts have taken divergent views in answering that question.
Circuit Court Decisions
The D.C. Circuit, in Swift v. United States, 318 F.3d 250 (D.C. Cir. 2003), decided that the government has an “unfettered right” to dismiss based on the Executive branch’s “historical prerogative” to decline to prosecute a case. The Ninth Circuit, in U.S. ex rel. Sequoia Orange Co. v. Baird-Neece Packing Corp., 151 F.3d 1139 (9th Cir. 1998), and the Tenth Circuit in Ridenour v. KaiserHill Co., LLC, 397 F.3d 925 (10th Cir. 2005), imposed a rational-relation test: the government must establish a rational relation between dismissal and the accomplishment of a valid government purpose. If the government satisfies this test, the burden shifts to relator to show that dismissal is fraudulent, arbitrary and capricious, or illegal. So far, the Supreme Court has declined to step in, denying certiorari in April 2020 in United States ex rel. Schneider v. JP Morgan Chase Bank on the question of whether the government’s dismissal decisions constitute an “unreviewable exercise of prosecutorial authority.” Now, however, the Seventh Circuit has articulated a new standard, relying on Federal Rule of Civil Procedure 41(a) governing voluntary dismissals by plaintiffs. Continue reading “Seventh Circuit Weighs in on Government Dismissal Authority under the FCA”
Michael Joseph Montalbano
In January, the Department of Defense (“DoD”) released more information on its much-anticipated Cybersecurity Maturity Model Certification (“CMMC”) framework. While a final rule is not expected until the fall, contractors need to begin preparing now so they do not miss out on DoD contract opportunities.
What Is the CMMC?
The CMMC is a certification system that all DoD prime and subcontractors must comply with to be eligible to compete for and perform future DoD contracts. Under the new CMMC requirements, an accreditation body tapped by DoD will begin training third-party assessors in the spring of 2020, who will in turn certify defense contractors under the CMMC. There will be five CMMC certification levels, of ascending sophistication:
- Level 1 – Basic Cyber Hygiene
- Level 2 – Intermediate Cyber Hygiene
- Level 3 – Good Cyber Hygiene
- Level 4 – Proactive
- Level 5 – Advanced / Progressive
The contractor must comply with a combination of the following cybersecurity safeguards, depending on the certification level a contractor wants to achieve: (1) FAR 52.204 (Basic Safeguarding of Covered Contractor Information Systems); (2) NIST Special Publication 800-171 Revision 1 (“NIST Requirements”); (3) select subsets of a supplement to the NIST Requirements called NIST SP 800-171B; and (4) up to 171 “practices” identified in the CMMC. Though this may sound like a lot for contractors to process, DoD has released helpful appendices that put many of the requirements in easy-to-understand terms. Continue reading “New DoD Cybersecurity Regulations Are Coming—Is Your Company Ready?”
Merle M. DeLancey Jr., Jay P. Lessler, and James R. Staiger
The Federal Circuit’s recent decision in Acetris has left many contractors scratching their heads and asking questions. To recap, on February 10, 2020, the Federal Circuit held that, under the Federal Acquisition Regulation (“FAR”), to qualify as a “U.S.-made end product” under the Trade Agreements Act (“TAA”), a drug must be either “manufactured” in the United States or “substantially transformed” in the United States. (See Federal Circuit Holds Generic Drugs Manufactured in the U.S. from API Produced in India Qualify for Sale to U.S. under Trade Agreements Act (Acetris Decision).) This is a stark change from the Government’s long-held position that manufacturing and substantial transformation were one in the same.
As a result of the Acetris decision, federal contractors seeking to comply with or maintain compliance with the TAA are facing many questions. Some of the more prominent questions are below. Continue reading “After Acetris Decision, Trade Agreements Act Compliance Questions Abound: Contractors Need Guidance”
Merle M. DeLancey Jr., Jay P. Lessler, and James R. Staiger
Earlier today, the United States Court of Appeals for the Federal Circuit issued a decision that is sure to send shockwaves through the generic drug industry. In Acetris, the Federal Circuit held that a generic drug manufactured in the United States complied with the Trade Agreements Act (“TAA”) and could be sold to the Department of Veterans Affairs. The court made this determination even though the drug’s active pharmaceutical ingredient (“API”) came from a non-designated country, India. In reaching its decision, the court broke away from longstanding Customs and Border Protection (“CBP”) precedent that the country where the API was produced dictated the location of “substantial transformation” and thus the country of origin for any resulting drug. The court held that under the Federal Acquisition Regulation (“FAR”), to qualify as a “U.S.-made end product” under the TAA, a drug must be either “manufactured” in the United States or “substantially transformed” in the United States—but not be both.
For years, generic drug manufacturers that manufacture drugs in the United States from API produced in India and China have been precluded from selling their drugs to the U.S. Government under the TAA. The Federal Circuit’s Acetris decision opens up the U.S. Government market for generic drugs manufactured in the U.S. from API produced in India and China.
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”
Michael J. Slattery
The Department of Justice (“DOJ”) recently released its annual fraud statistics for FY 2018. The statistics reveal that False Claims Act (“FCA”) recoveries reached their lowest level since FY 2009. However, although total recoveries are down, this decrease is more a by-product of a down year in major health care and financial services recoveries, and we think it is too early to view these numbers as reflecting a sea change in enforcement.
The annual statistics published by DOJ on December 21, 2018 demonstrate that the Government recovered a total of $2.88 billion in qui tam and non-qui tam FCA judgments and settlements in FY 2018. This represents the lowest amount recovered since FY 2009, when the Government recovered nearly $2.47 billion. It also demonstrates a short-term trend in declining recovery. FY 2018 was the second straight year in which fraud recovery decreased. However, recent comments by the Trump administration’s nominee for U.S Attorney General likely indicate that no affirmative decision to decrease FCA actions will occur in the next few years. Continue reading “What DOJ’s FY 2018 False Claims Act Recovery Statistics Reveal”
Justin A. Chiarodo and Stephanie M. Harden
The Department of Justice’s (“DOJ”) bombshell statement last month that it would seek dismissal of the Gilead False Claims Act (“FCA”) suit—a qui tam suit alleging misrepresentations and concealments regarding active ingredient sources and quality for HIV medications—surprised many in the government contracts community. Though DOJ had signaled earlier last year in the so-called “Granston memo” that it may seek dismissal of certain FCA cases, the fact that DOJ sought to do so while a case was on appeal to the Supreme Court—and without consulting relators—was unexpected. Continue reading “Breaking Camp(ie): Supreme Court Sends Gilead FCA Case Back for Likely Dismissal, Postponing Escobar’s Return”