Category: False Claims Act and Procurement Fraud

3 Tips to Reduce False Claims Act Exposure in the Wake of United States ex rel. Schutte v. SuperValu, Inc.

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Justin A. Chiarodo, Jennifer A. Short, Stephanie M. Harden, Samarth Barot, and Oliver E. Jury ●

2023 is shaping up to be a major year in False Claims Act (“FCA”) practice, with the Supreme Court weighing in on both FCA scienter (in SuperValu) and the reach of the government’s dismissal authority (in Polansky), and the government focusing its enforcement efforts around antitrust, cyber, and national security. We focus today on the United States ex rel. Schutte v. SuperValu, Inc. decision, in which the Supreme Court held that a contractor’s subjective belief about its compliance at the time it submitted claims for payment is relevant to whether it had the requisite scienter for FCA liability. Much has been written on this case, with most articles exploring esoteric concepts like “scienter,” “falsity,” and the “objectively reasonable person.” But assuming—as we do—that the decision will reduce the prospect of successful early dispositive motions, what practical steps can contractors take to reduce their False Claims Act exposure and avoid litigation in the first place? We offer three suggestions.

We begin with a basic refresher on the issue presented in SuperValu. A defendant is not liable under the False Claims Act unless it “knowingly” (including acting with “reckless disregard”) submits a false claim to the government. The “knowing” scienter element—particularly around reckless disregard—can be difficult to prove in the world of complex and often ambiguous laws and regulations that govern contractors’ compliance. The federal circuits had split on the issue of whether a defendant’s subjective interpretation at the time it submitted claims for payment to the government was relevant to determining FCA “knowledge” if the defendant could later show that the underlying rule was ambiguous and its conduct (regardless of its contemporaneous understanding or belief) was consistent with an objective, reasonable interpretation of the unsettled requirement. SuperValu resolved the debate by holding that whether a defendant knowingly violated the FCA—and satisfied the scienter element—must consider the defendant’s real-time “knowledge and subjective beliefs.” United States ex rel. Schutte v. SuperValu, Inc., 143 S. Ct. 1391 (2023).

Continue reading “3 Tips to Reduce False Claims Act Exposure in the Wake of United States ex rel. Schutte v. SuperValu, Inc.“

The Once and Future King: SCOTUS Maintains the Government May Intervene in Previously Declined FCA Matters to Seek Dismissal

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Luke W. Meier and Carolyn R. Cody-Jones ●

Last Friday, June 16, 2023, the U.S. Supreme Court (“SCOTUS”) ruled that the federal government may seek to dismiss a qui tam False Claims Act (“FCA”) suit over the relator’s objection, even where it previously declined to intervene in the case and the relator invested in moving the case forward. The 8-1 decision by the high Court firmly established the broad authority for the government to intervene in such circumstances under a Rule 41(a) “reasonableness” standard, explaining that the key reason for this is that “the government’s interest in [an FCA] suit … is the predominant one” based on the “FCA’s government-centered purposes.” United States Ex Rel. Polansky v. Executive Health Resources, Inc., Slip. Op. No. 21–1052, at 12, 599 U.S. ____ (2023).

When an FCA suit is filed, the government has 60 days (which is typically extended) under the FCA statute to decide whether to decline or intervene in the case. See 31 U.S.C. § 3730. If declined, the relator may proceed with the litigation without the government’s support. The statute also allows the government to intervene “at a later date upon a showing of good cause.” § 3730(c)(3). As of 2022, publicly available statistics show that the government has elected to intervene only in about 40 percent of all qui tam FCA matters subject to judgment or settlement.

Continue reading “The Once and Future King: SCOTUS Maintains the Government May Intervene in Previously Declined FCA Matters to Seek Dismissal”

What Is “Knowing” under the FCA? Supreme Court to Consider Impact of Ambiguous Regulations

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Jennifer A. Short, Bridget Mayer Briggs, and Tjasse L. Fritz ●

Jennifer A. Short headshot image
Bridget Mayer Briggs headshot image
Tjasse L. Fritz headshot image

A successful False Claims Act (“FCA”) claim must show that the defendant submitted a false claim or statement “knowingly.” The “knowing” element—the scienter prong—depends on whether the defendant actually knew that the claim or statement was incorrect, or recklessly disregarded the facts or legal requirements that rendered the claim “false.” But, of course, government regulations, contract terms, and grant requirements can be incredibly complex and difficult to understand. When the ground rules are unclear, how does a company “know” that its claims for payment may be false under the FCA?

What does the FCA say about “knowing”?

The FCA defines “knowing” as (1) having “actual knowledge of the information;” (2) acting “in deliberate ignorance of the truth or falsity of the information;” or (3) acting “in reckless disregard of the truth or falsity of the information.” 31 U.S.C. § 3729(b). A “specific intent to defraud” is not required for liability under the FCA. 

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FY 2023 NDAA Muddies the Water on Whether Chinese Semiconductor Ban Will Apply to Contractors

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Robyn N. Burrows ●

Last month, we wrote about a proposed amendment to the FY 2023 National Defense Authorization Act (“NDAA”) that would prohibit contractors from selling certain Chinese semiconductor technologies to federal agencies and from using these same covered products and services. This measure was added through Section 5949 of the NDAA.

On December 6, the House passed a compromise version of the NDAA, which appears to scale back the semiconductor ban by applying it only to federal sales of covered products and services, without also banning contractors from using them. However, the explanatory statement accompanying the NDAA suggests contractors (including their affiliates and subsidiaries) may ultimately be prohibited from using covered semiconductor technologies—which would raise a host of compliance and implementation concerns.

Compromise Version of NDAA Limits Semiconductor Ban to Federal Sales

Section 5949 bans semiconductor products and services from Semiconductor Manufacturing International Corporation, ChangXin Memory Technologies, and Yangtze Memory Technologies Corp., plus their subsidiaries and affiliates. This ban was modeled after the supply chain restrictions from Section 889, which prohibit contractors from selling and using covered telecommunications and video surveillance equipment from five Chinese telecom companies.

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Senate Majority Leader Schumer Proposes Section 889 Expansion

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Robyn N. Burrows and Merle M. DeLancey, Jr. ●

On October 18, 2022, Senate Majority Leader Chuck Schumer (D-NY) issued a press release signaling a potentially significant expansion of Section 889 through a proposed amendment to the 2023 National Defense Authorization Act (“NDAA”). Schumer’s proposal is aimed at extending the telecommunications supply chain prohibitions in Section 889 to the semiconductor manufacturing industry.

Section 889 currently prohibits contractors from providing the federal government or using any products or services that incorporate “covered telecommunications equipment or services” from five Chinese telecom companies and their affiliates and subsidiaries: (1) Huawei Technologies Company, (2) ZTE Corporation, (3) Hytera Communications Corporation, (4) Hangzhou Hikvision Digital Technology Company, and (5) Dahua Technology Company.

Schumer’s 2023 NDAA amendment would expand Section 889 by banning semiconductor products like microchips from the following three Chinese entities: (1) Semiconductor Manufacturing International Corporation (“SMIC”), (2) ChangXin Memory Technologies (“CXMT”), and (3) Yangtze Memory Technologies Corp. (“YMTC”). Schumer noted that these companies have known links to the Chinese state security and intelligence apparatuses. The amendment is aimed at filling a gap in federal procurement restrictions that currently do not include semiconductor technology and services, creating a vulnerability for cyberattacks and data privacy. The amendment would not take effect until three years after the NDAA’s enactment, or until 2025.

Although we do not yet know whether Schumer’s amendment will be incorporated into the final NDAA bill, contractors should nevertheless begin evaluating their supply chains to identify any semiconductor products from any of the three named Chinese manufacturers. Schumer’s amendment signals a continually expansive interpretation and enforcement of Section 889, which may be reflected in the final rulemaking for Section 889. The current FAR docket anticipates a final rule in December 2022, although these deadlines continue to be moving targets.

How to Manage a Potential Whistleblower

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Dominique L. Casimir, Jennifer A. Short, and Michael Joseph Montalbano ●

Jennifer A. Short headshot image

The federal False Claims Act (“FCA”) is one of the United States’ most effective tools to detect and prevent fraud against the Government. One reason the FCA is so effective is that it encourages the employees of an organization to come forward as claimants and receive a share of any financial recovery to the Government. Recognizing the central role of these whistleblowers in the FCA’s enforcement scheme, Congress included an anti-retaliation provision in the statute that protects them when they report suspected fraudulent conduct. Under the FCA’s anti-retaliation provision, employees, contractors, or agents can sue for damages on their own behalf if they are “discharged, demoted, suspended, threatened, harassed, or in any other manner discriminated against in the terms and conditions of employment because of lawful acts done” in connection with a reported FCA violation. 31 U.S.C. § 3730(h)(1). Likewise, nearly every state also affords some degree of whistleblower protection, either statutorily or in the common law.

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November 9, 2022: “Legal and DoJ Matters”

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Blank Rome partner Justin A. Chiarodo will serve as a panelist at Federal Publications Seminars and Capital Edge Consulting’s 2022 Government Contract Accounting and Regulatory Update, being held November 9 and 10, 2022, in Arlington, Virginia.

Justin’s session, “Legal and DoJ Matters,” will take place Wednesday, November 9, from 8:30 to 10:00 a.m., and the panel will cover settlement and judgments from recent civil fraud and false claims, penalty assessments, and emerging issues.

For more details, visit our website.

DoD Section 889 Telecommunications Prohibition Waiver Expires

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Merle M. DeLancey Jr. ●

Effective October 1, 2022, Department of Defense (“DoD”) contractors must comply with Part B of Section 889 of the FY 2019 National Defense Authorization Act (“NDAA”). The approximately two-year long Part B waiver granted to the Director of National Intelligence expired October 1. DoD contractors cannot seek a DoD agency-level waiver as DoD cannot grant waivers under the statute. Thus, as with other agencies, DoD is prohibited from entering into, extending, or renewing contracts with contractors who use covered telecommunications or video surveillance equipment and services from certain Chinese companies in any part of their business.

Compliance with Part A of Section 889 was straightforward. Part A prohibited contractors from selling covered technology to the federal agencies. Comparatively, compliance with Part B is much more complicated. Part B requires a contractor to certify that it does not use “any equipment, system, or service that uses covered telecommunications equipment or services as a substantial or essential component of any system, or as critical technology as part of any system.” The prohibition applies to all contracts at any dollar value. “Covered telecommunications equipment or services” is defined as equipment, services and/or video surveillance products from Huawei Technologies Company, Hangzhou Hikvision Digital Technology Company, Hytera Communications Company, Dahua Technology Company, ZTE Corporation, or any entity controlled by the People’s Republic of China.

For more information regarding Part B compliance, see our prior posts For Part B of Section 889, Is Compliance by August 13, 2020, Realistic? and Five Steps to Take to Prepare for Part B of the Section 889 Ban.

Partial Settlement and Allocation of Damages Liability under the False Claims Act (“FCA”)

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Jennifer A. Short, Bridget Mayer Briggs, and Tjasse L. Fritz ●

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Bridget Mayer Briggs headshot image
Tjasse L. Fritz headshot image

On August 30, 2022, the D.C. Circuit Court of Appeals brought renewed attention to the conundrum of False Claims Act (“FCA”) damages by applying a pro tanto allocation rule to a partially settled case. In United States v. Honeywell International Inc., No. 21-5179, 2022 WL 3723020 (D.C. Cir. Aug. 30, 2022), the court reasoned that, because the government had already recovered its full alleged damages through co-defendants’ settlements, it could not seek additional damages from the remaining defendant, regardless of that defendant’s alleged misconduct.

The FCA’s Treble Damages Provision

Under the FCA, 31 USC § 3729-3733, “any person” found to have violated the statute:

is liable to the United States Government for a civil penalty of not less than $5,000 and not more than $10,000, as adjusted … plus 3 times the amount of damages which the Government sustains because of the act of that person.

In United States ex rel. Marcus v. Hess, 317 U.S. 537 (1943), the Supreme Court described “damages which the Government sustains because of the act of that person” as the amount the government would have paid for the fraudulent goods or services had it known the relevant facts. The Court further rationalized that allowing damages to be multiplied per the statute was consistent with the common law tradition of civil punitive damages. In the 80 years since Marcus, courts have continued to grapple with the nature and calculation of FCA damages: whether they are punitive or compensatory; whether they are sufficiently predictable to encourage settlement; and whether they serve as a sufficient deterrent for wrongful conduct.

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Polansky and the Future of FCA Qui Tam Prosecution

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Jennifer A. Short, Tjasse L. Fritz, and Bridget Mayer Briggs

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Tjasse L. Fritz headshot image
Bridget Mayer Briggs headshot image

In its upcoming term, the U.S. Supreme Court is poised to address the issue of whether the United States can seek to dismiss a whistleblower’s False Claims Act (“FCA”) lawsuit after it has elected not to participate in the case. And, if it can seek dismissal, what standard should apply?

On June 21, 2022, the Court agreed to consider the matter of United States ex rel. Polansky v. Executive Health Resources, Inc. (Case No. 19-3810). In his cert petition, the whistleblower presses the theory that after the United States declines to intervene in an FCA qui tam case, it lacks any authority to dismiss the action. At a minimum, the petitioner argues that the Court should resolve a long-standing split among the Circuit Courts regarding the standard that applies to such a motion—a split that has splintered even further in response to an uptick in such motions since 2018.

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