Why a Washington False Claim Act Should Not Apply to Construction Contracts – Part II

This is the second part of the two-part blog urging lawmakers to vote against a False Claims Act in Washington.

C. England Rejected Qui Tam Enforcement 70 Years Ago

U.S. law finds its origins in English common law, thus it is instructive to inquire into England’s disposition of Qui Tam laws because Qui Tam concepts were originally adopted from England.

England’s experience with a broad Qui Tam enforcement system provides an excellent preview of things to come if the proposed statute of this nature is enacted in Washington.  That history is described in a scholarly study published in 2000 by Prof. Randy Beck, who traced the decline and ultimate repeal, in 1951, of England’s Qui Tam laws.[i]  Prof. Beck describes the country plagued by malicious and harassing Qui Tam prosecution and reports that public sentiment turned against Qui Tam enforcement in England because of “the obnoxious practice of common informers,” who are widely perceived to be practicing a form of “legalized blackmail.”[ii]  As Prof. Beck notes:

A further defect in the system of Qui Tam enforcement related to selection of targets for prosecution.  Ideally, a public prosecutor exercises discretion in choosing prosecution targets in order to avoid applying a statute in ways that undermine the public interest.  A Qui Tam statute eliminates any incentive for a benevolent exercise of prosecutorial discretion.  The common informer has little reason to consider broader issues of public policy raised by particular prosecution, and in fact has a strong financial incentive not to take such consideration into account.  The result is that informers pursue litigation that disinterested prosecutors would consider contrary to the public good.[iii]

Adoption of a law in Washington will likewise undermine public support for the goal of preventing fraud in this state.

D. FCA Misconceptions:  Why the FCA Should Not Apply to Construction

  1. 1. Qui Tam Enforcement Will Be Abused by the Plaintiff’s Bar

FCA works best when government investigates, intervenes, and determines whether or not a case has merit and, if so, prosecutes the case.  The declined cases are by and large meritless, and focus on questionable causes or small businesses and institutions which can ill-afford to defend themselves.  The involved violations of regulations without loss to the state treasury are contrary to public policy and common sense.

  1. 2. Qui Tam Enforcement Does Not Target Large Business

Another misconception – largely perpetuated by the plaintiff’s profits in Qui Tam claims – with these types of statutes is that plaintiff protections are necessary because plaintiffs only pursue big corporate frauds committed by large companies.  Some Qui Tam cases are filed against large companies, but the majority of defendants in Qui Tam cases are small businesses, local governments, and nonprofit institutions.  Nonprofit institutions and public entities cannot, in many instances, afford to defend themselves against treble damages and oppressive penalties.  Instead, they are forced to divert valuable resources, because failing to do so would expose them to the risk of bankruptcy.

  1. 3. Innocent Companies and Institutions Are Adversely Affected by Qui Tam Enforcement of FCA

The third most common misconception is that Qui Tam enforcement only targets those who clearly defraud the government.  In fact, the opposite is true, and drawn out litigation of meritless cases costs the American public dearly.  Qui Tam cases are filed every day against almost every type of institution in America.  In 80% of these cases, the government investigates them and declines to intervene, yet the Qui Tam relator and a lawyer proceed with the hopes of a big payout.  These declined cases bring only a small fraction of all FCA recoveries, yet they must be vigorously defended because of the onerous treble damages and penalties that will bankrupt most institutions.  Some large defense contractors can try to pass a portion of these defense costs onto the government; most small businesses and grantees have no ability to do so.  They must simply absorb these costs as a “cost of doing business” with the government.  For many businesses, Qui Tam enforcement makes that cost too high.

  1. 4. Many Qui Tam Cases Are Inconsistent With Government Policy and Public Interest

Most FCA cases brought by Qui Tam relators without Department of Justice intervention do not involve claims for services that were never rendered or products that were defective or never delivered.  Instead, the more commonly involved allegations are ones in which, in the course of manufacturing a product or providing a service, a defendant falsely represented or certified that it was complying with various laws, regulations, and contract terms (the University of New Mexico “The Pit” case is such an example).  Qui Tam relators allege that such certifications are a basis for liability even if the government is accurately billed for the correct amount.  It becomes a daunting task conducting business in such an environment where such certifications become whistleblower-driven compliance traps, which can cost hundreds of millions of dollars and have the real capacity to cripple organizations that are often among the most important employers in the community.

  1. 5. Extravagant Excessive Bounties Encourage Frivolous Qui Tam Litigation

Qui Tam relators can receive up to 30% of an FCA settlement or judgment.  Large settlements paid in recent years on federal government contracts have produced extravagantly large relator share payments.  This analysis is relevant to the legislative consideration of the proposed statute because it reveals how a lottery-like aspect of the statute encourages frivolous litigation that comes at significant direct and indirect cost to consumers, businesses, and taxpayers.  Though most relators do not get million-dollar prizes, the hope of a lotto payoff encourages the individuals to take a chance on a Qui Tam suit.  If nothing else, claiming whistle-blower status often allows the problematic employees to extract some sort of payment from their former employers.  The proposed legislation will cause economic inefficiencies and abuses and could have a particularly catastrophic effect on Washington business in the currently difficult economic environment.

  1. 6. Why FCA Does Not Work for Construction

Fraud in Washington construction contracts is not a major concern raised by any of the public or private entities.  The proposed legislation is a gross overreaction to a perceived problem that does not exist in construction.  There is no outcry by public owners that indicates in any manner that fraudulent claims are a problem in the state of Washington or that legislation of this sort is necessary to dissuade any sort of perceived behavior.

Further, the Mike M Johnson [see previous posts and articles:  Contractor Dodges Notice Bullet; Bills of Interest to Contractors; Another Station in the Gauntlet WA State Bar Article Part I; WA State Bar Article Part II; WA State Bar Article Part III] decision, which provided that construction claims are forfeited if the contractor fails to strictly comply with a contract’s written notice requirements irrespective as to whether there is any prejudice to the owner, have had a chilling effect on contractors seeking compensation for meritorious project scope increases and changes.  There is little appetite in the construction community for another statute that would further discourage and preclude contractors from seeking proper compensation for design changes, scope increases, and differing site conditions.

Comment:  We have first-hand experience of the devastating effects that the abuse of the FCA can visit upon a simple construction extra work claim.  We represented a contractor with a straightforward delay/impact claim against the state of Alaska recently.  Three weeks before the trial was to occur, an ambitious and inexperienced assistant attorney general, after being “tipped off” that the contractor’s equipment, which had been charged “standby” basis in the claim was actually being used on another project, amended the pleadings and brought a fraud action against our client.  The assertion was that since the general contractor had certified that the equipment was on standby, but the equipment was allegedly working on another project, the contractor’s claim was “false.”  The state of Alaska asked the judge to forfeit our client’s claim.  This was a serious charge and the contractor had a difficult choice to make: whether to seek a continuance or proceed with the trial.  Ultimately, the contractor opted to press ahead.  The effect of the fraud allegation on the litigation was drastic.  We estimate that 40% of the trial and tens of thousands of dollars were spent in running the fraud allegations to ground.  In the end, the state did not call a single witness to support its fraud allegation (not even the alleged informant), but put the contractor to the burden of demonstrating that its equipment was indeed on standby and not used to generate revenue on another project.  Ultimately, the contractor prevailed both on its delay claim and on the fraud charge.  The cost to the contractor of running the red herring FCA issue to ground was substantial.

The more disturbing aspect of this case is the fact that a fraud allegation is an extremely powerful weapon in the government lawyer’s arsenal.  If proven, the consequences of a fraud are not only forfeiture of the claim, but also possible disbarment (nonparticipation in government contract work).  Government lawyers, when given powerful weapons, are inclined to use those weapons in litigation.  The mere fact that a fraud allegation may be brought against the contractor and the impact that it could have on the contractor’s business is so dire that the contractor, in many cases, may be inclined to simply cave in on the claim, and take a less than satisfactory settlement simply to avoid the risk of the drastic consequence of fraud allegation might have.  The long-term effect of such abuse of the FCA on the taxpayers will be severe.  Contractors realizing that fraud allegations may be visited upon them as a defense to a valid claim will be inclined to put contingencies in their bids to cover meritorious extra work items for which they will no longer bring claims.  In the long run, the cost of construction to the taxpayers will increase to the detriment of all of us.  In my view, based on my first-hand experience, the FCA is not appropriate in construction contracts since a myriad of other remedies remain available to the owner to combat any inflated or false claims that may arise.

[i] See J. Randy Beck, The False Claim Act and The English Eradication of Qui Tam Legislation, 78 NCEL. Rev. 539 (2000).

[ii] Id. at 603-604.

[iii] Id. at 583 (internal citations omitted).

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