Why a Washington False Claims Act Should Not Apply to Construction Contracts – Part I

We can expect the perennial False Claims Act bill to be on Washington lawmakers’ 2014 legislative agenda again this year.  This is part one of a two-part blog urging lawmakers to vote against passage of a False Claims Act pertaining to construction in Washington.

In 2005, the federal government enacted legislation that incentivized states to pass state-law versions of the False Claims Act (“FCA”).  The federal law provides that if the state enacts legislation “as effective as” FCA, then the state will be entitled to a larger recovery from future Medicaid fraud settlements.  Twenty-nine states and the District of Columbia have enacted state versions of the FCA, including Oregon and Alaska.  This legislation may have some applicability to Medicaid fraud prevention, but, as pointed out below, is not appropriate in construction contracts.

  1. A. FCA Explained

Enacted during the American Civil War, the FCA has sought to deter, recoup, and punish fraud committed by government contractors.  The FCA has evolved since its conception, most notably in 1986 when Congress added the treble damages provisions and lowered the burden of proof.  Currently, the FCA plays a prominent role in prosecuting fraud in federal government construction contract and procurement fraud generally.  In essence, the FCA is a civil statute creating liability for fraud against the federal government.  A whistle-blower (referred to in the FCA as a “relator”) may enforce the Act by filing a Qui Tam suit under seal while the government decides whether to intervene by joining in the suit.  Alternatively, the government may commence an action without the aid of the whistle-blower.  Punishment for violation of the FCA is a fine of $5,000-$10,000 per false claim, plus treble damages.[i]

B. Business Community Concerns With Qui Tam Enforcement

1. Qui Tam Explained

    1. In the Qui Tam provisions of the FCA, the legislature purports to authorize any person to prosecute, on behalf of the state of Washington and in the name of the state of Washington, a civil fraud for treble damages and penalties against any person who allegedly makes a false claim to the state government.[ii]  Unlike normal citizen suits, the Qui Tam plaintiff – or so-called “relator” – is empowered to sue, on the state’s behalf, even if he or she has not sustained any personal injury as a result of the wrongdoer’s alleged misconduct.  As a bounty for prosecuting the fraud, the relator receives up to 30% of any damages and penalties recovered with the balance paid into the state treasury.  The relator is empowered to prosecute the state’s claim even when the Attorney General has determined there is no valid claim or that pursuing the suit is not in the interest of the state.

Through Qui Tam suits, the statute attempts to create universal standing to prosecute purely public offenses.  These Qui Tam suits pose a devastating threat to the executive branch’s (governor’s) constitutional authority and to the doctrine of “Separation of Powers.”  If Qui Tam suits are upheld, it would mean that the legislature will have a carte blanche to divest the executive branch of its constitutional authority to enforce laws and vest that authority on its own corps of private bounty hunters.  By simply attaching the penalty to a violation of law and offering a bounty to any person who sues, the legislature will effectively privatize civil law enforcement.  Indeed, through this device the legislature has authorized each of its own members and any other government employee (as a “person”) to enforce the laws directly.  The prohibited conduct is broadly defined.

The FCA creates civil liability for any person who knowingly submits a false claim for payment to the state government, knowingly uses a false statement to induce the state to pay false claim, conspires to defraud the state government to pay false claim, or knowingly uses a false statement to increase an obligation to pay money.  “Claims” include all requests for payment of money or property where the state government pays for any part of the money or property in question.  “Knowing” conduct embraces actual knowledge of a falsehood, as well as “deliberate ignorance” or “reckless disregard” of the truth.[iii]

  1. 2. A Recent Construction Case, Aptly Involving “The Pit,” Demonstrates the FCA’s Pitfalls and Misuse[iv]
  • Background

The University of New Mexico (“UNM”) awarded a Construction Management contract to renovate its historic basketball arena, “The Pit.”  UNM expected the renovation to include all the difficulties inherent in upgrading a historic building (The Pit was first used in 1966).  The project was made more difficult by the fact that UNM required that its basketball teams be able to play games in The Pit while construction was underway.

To overcome these obstacles, UNM used the alternative procurement vehicle of the “Construction Manager at Risk” (“CM”).  UNM hired the CM to assist its designers in bringing the scope of the project within UNM’s anticipated budget and time requirements.  Once the parties agreed upon that scope, Request for Proposals went to subcontractors.  UNM, with the CM’s advice, selected subcontractor’s bids.  In a competitive procurement process, three companies submitted CM bids for The Pit project, and ultimately UNM selected Flintco West, Inc. (“Flintco”).  

After Flintco was selected, UNM increased the scope of the project in numerous ways, such as adding features to the project and accounting for unexpected conditions.  Flintco submitted change order requests to UNM’s architect, who reviewed and approved or rejected the change order requests as appropriate.  The architect then forwarded the approved change order requests to UNM for further review and execution.  UNM did not send change orders to the UNM Board of Regents, the group that approved the initial CM contract amount.

Pursuant to the UNM requirements, each of Flintco’s Certificates of Payment was accompanied by an AIA Form G702.  That form includes a certification stating “to the best of the Contractor’s knowledge, information and belief, the work covered by this application for payment has been completed in accordance with the contract documents….”  Nowhere in the G702 or generally in the project contract did UNM define which specific elements of the contract documents were actually material to its decision to make payments for the work performed.

  • Alleged FCA Violation

Before the completion of the project, plaintiffs brought a suit alleging fraud under the New Mexico FCA (Fraud Against Taxpayers Act or “FATA”).  The plaintiffs were not government whistle-blowers, or any persons or entities associated with the project.  Instead, they were two unions.  Those entities did not assert that they knew of any fraud against the government, but rather admitted they brought suit solely because they did not want the project awarded to Flintco (plaintiffs asserted they wanted to prevent award of projects to entities that might use an out-of-state workforce – Flintco was a longtime New Mexico contractor with a corporate parent in Oklahoma).  Having no meaningful information regarding the project, these plaintiffs did not allege a fraud in the traditional sense, i.e. they did not claim that Flintco failed to provide what it had agreed to provide or that it had charged more than the agreed-to rate for what it provided.  Instead, the plaintiffs asserted the existence of a “legal fraud.”

“Legal frauds” are those where the good or service was actually provided at the price to which the parties’ agreed, but where there is some alleged subsidiary malfeasance creating a fraud.  Perhaps the broadest of these types of fraud is the certification liability.  The essential form of certification liability is “express certification,” which is the violation of a requirement, compliance with which the contractor has expressly certified.  An example of an express certification violation would be that of a student who copies another’s work and then submits the copied work with a signed statement that the work is the student’s own work.  

In the Flintco matter, the plaintiff’s alleged the existence of the certification “fraud.”  Specifically, the unions took the general language from G702 and argued that it was Flintco’s guarantee that it had complied with every requirement in the parties’ contract, UNM’s general conditions for contractors and all of UNM’s non-construction policies and procedures, and also all of the plans, instructions, supplemental instructions, and change orders for The Pit project itself.  The unions culled through tens of thousands of pages of documents and found two alleged certification frauds.

First, the unions asserted that a contractual requirement of “full and detailed accounts” required accounting procedures for expenditures beyond those Flintco employed on the project.  Second, plaintiffs asserted that the contractual language addressing changes to the contract price was to be read to require UNM to obtain additional authorizations for each change order, beyond those that UNM in fact did obtain (the requirement that each change be submitted to the Board of Regents for approval).  Both allegations do not involve “fraud” in the conventional sense, but the allegations can be brought even though there has been no harm to the taxpayers merely by alleging noncompliance with the voluminous contract documents.

  • The Decision

At trial, the jury dismissed all claims against the defendants after only a three-hour consideration on March 5, 2013, which included time for lunch.  The jury found that the plaintiffs failed to show the need for additional accounting procedures in light of the uncontradicted testimony that UNM had agreed to the accounting procedures that Flintco used.  The unions also failed to show the need for additional authorizations in light of the uncontradicted testimony that UNM’s policies were not read in the manner that the unions read them.

Although the contractor prevailed, the fact that this issue was able to proceed to trial even though the unions had no actual evidence is what makes the issue noteworthy.  The wide availability of FCA suits and the multipliers increasing the potential recovery make these lawsuits a tempting target for opportunistic litigation and very costly for public works construction contractors.

See next Blog article for the reason why the FCA has no applicability to construction contracts.

[i] 231 USC §3729 (a)(1) (2009).

[ii] The description of Washington’s purported FCA is drawn from previous failed legislative drafts.

[iii] Though the draft of the legislation is not available, notes are drawn from previous legislative drafts.

[iv] See 15 Under Construction 3, ABA Forum on Construction Industry, “Best Practices to Limit State-Law False Claims Act (FCA) Liability,” A. Lyons (2013).

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