by Jerald D. Stubbs
The Federal False Claims Act (FCA), 31 U.S.C. §§3729-3733 (Supp. IV 2010), imposes civil penalties and treble damages for making false claims against the United States and its contractors, grantees, and other recipients of federal funds.1 Described as “one of the most potent civil tools for rooting out waste and fraud in the [federal] [g]overnment,”2 the FCA’s purpose is to enable the government to “recover losses sustained as a result of fraud….”3
The 2009 amendment4 to the False Claims Act significantly expanded the types of fraud subject to the FCA, according to the senate report accompanying the 2009 amendment.5 Generally, Congress intended the amendment to extend the reach of the FCA to false claims made to contractors and grantees of the federal government when these claims are paid with federal funds.6 The amendment was needed, stated the senate report, to correct the erroneous interpretations of the FCA in Allison Engine Co. v. United States ex rel. Sanders, 553 U.S. 662 (2008), and United States ex rel. Totten v. Bombardier Corp., 380 F.3d 448 (D.C. Cir. 2004). Understanding these decisions is helpful to understanding the 2009 amendment.
This article examines the statutory text to determine if Congress succeeded in changing the FCA as claimed in the senate report. An examination of the text is important because the Supreme Court considers legislative history irrelevant if the text is clear.7 This article concludes that Congress succeeded as intended.
This article will first describe the 2009 amendment and then examine two earlier amendments to the FCA that help to understand the 2009 amendment. This is followed by a discussion of the court interpretations of the FCA that prompted Congress to enact the 2009 amendment. This article then assesses whether the 2009 amendment accomplished the result Congress intended, and concludes with a discussion of how far the 2009 amendment expanded the types of fraud subject to the FCA and the types of fraud not subject to the FCA.
The 2009 Amendment
As amended, 31 U.S.C §3729 imposes a civil penalty of $5,000 to $10,000 and triple the damages the government sustains for seven categories of acts.8 The first two are the subject of this article: “(a)(1)(A) knowingly presents, or causes to be presented, a false or fraudulent claim for payment or approval; [or] (B) knowingly makes, uses, or causes to be made or used, a false record or statement material to a false or fraudulent claim.” The first clause will be referred to as the “presentment” clause, and the second as the “statement” clause.
The term “claim” is defined in §3729(b)(2).
(A)…any request or demand, whether under a contract or otherwise, for money or property and whether or not the United States has title to the money or property, that—
(i) is presented to an officer, employee, or agent of the United States; or
(ii) is made to a contractor, grantee, or other recipient, if the money or property is to be spent or used on the [g]overnment’s behalf or to advance a [g]overnment program or interest, and if the United States [g]overnment—
(I) provides or has provided any portion of the money or property requested or demanded; or
(II) will reimburse such contractor, grantee, or other recipient for any portion of the money or property which is requested or demanded….
Earlier Amendments to the FCA
The meaning of the 2009 amendment requires an understanding of two earlier amendments to the FCA. The first was in 1982,9 as part of Congress’ decision to “revise, codify, and enact without substantive change certain general and permanent laws related to money and finance as title 31.”10 The FCA was included as 31 U.S.C. §§3729-3731 (1982).11 The presentment and statement clauses of §3729 provided:
1) knowingly presents or causes to be presented, to an officer or employee of the government or to a member of an armed force a false or fraudulent claim for payment or approval; [or]
2) knowingly makes, uses, or causes to be made or used, a false record or statement to get a false or fraudulent claim paid or approved[.]12
The term “claim” was not defined.13
Congress enacted the second amendment in 1986, which made substantive changes to the FCA, most of which are not relevant here.14 Two substantive changes, however, are relevant.
First, the 1986 amendment added a new section (c) to define the term “claim.”
(c) Claim defined. For purposes of this section, “claim” includes any request or demand, whether under a contract or otherwise, for money or property which is made to a contractor, grantee, or other recipient if the United States Government provides any portion of the money or property which is requested or demanded, or if the [g]overnment will reimburse such contractor, grantee, or other recipient for any portion of the money or property which is requested or demanded.15
This definition of a “claim” was intended to ensure that the FCA encompassed not only claims and statements submitted to the United States government, but also claims and statements submitted to a party other than the federal government “if the payment … would ultimately result in a loss to the United States.”16 As examples, the senate report cited claims and statements made to the recipient of a grant from the United States or to a state under a grant partly funded by the United States.17 According to the senate report, this subsection defining claim “clarifies that … the False Claims Act [applies to] frauds perpetrated on [f]ederal grantees, including [s]tates and other recipients of federal funds.”18 The senate report cited with approval the court decisions that concluded the FCA covered Medicare claims submitted to private companies and Medicaid claims submitted to state agencies.19 In the case of Medicaid, which is partly funded by the federal government, the senate report cited with approval United States ex rel. Davis v. Long’s Drugs, 411 F. Supp. 1144, 1146-47 (S.D. Cal. 1976). In this case, the court held that the FCA applied to the Medicaid program administered by the state and paid for with equal state and federal funding and involving significant federal regulation and involvement.20 According to the senate report, this holding should apply in “other circumstances where claims are submitted to [s]tate, local, or private programs funded in part by the United States where there is significant federal regulation and involvement.”21
The new subsection defining “claim” was also intended to overrule United States v. Azzarelli Construction Co., 647 F. 2d 757 (7th Cir. 1981). The court in Azzarelli held that the FCA did not apply to a false claim and statements made to a state agency, even though the United States provided 70 percent of the funds for the two public highway construction projects. In Azzarelli, the Seventh Circuit acknowledged that the FCA could apply to false claims and statements made to a state agency who in turn submits the claim to the United States for payment.22 The court, however, distinguished between open-ended programs and closed-ended programs.23 Medicaid, stated the court, is an open-ended program in which there is no ceiling on the total amount the federal government will disburse to a state.24 In a closed-ended program, such as the program that included the highway construction projects in Azzarelli, the federal government decides in advance according to fixed formulas how much it will contribute to each state for a fixed period and that amount will not be exceeded.25 The court stated that the fraud may have increased the United States’ contribution to the two highway construction projects. Such fraud, however, would not have caused any increase in the United States’ contribution to the state for the time period in question because this contribution was fixed. 26 In the court’s view, the fraud in the case before it had no effect on federal funds; rather it was the state that was injured.27 The senate report stated that the new subsection was intended to “overrule Azzarelli and similar cases which had limited the ability of the United States to use the FCA to reach fraud perpetrated on federal grantees, contractors or other recipients of [f]ederal funds.”28
The second change Congress made was to the statement clause. The change was to add “by the government” at the end of the clause. As amended, §3729(a)(2) read: “(2) knowingly makes, uses, or causes to be made or used, a false record or statement to get a false or fraudulent claim paid or approved by the government.”29 The legislative history suggests Congress did not intend this to be a substantive change.30 As the next section shows, however, this change led to court interpretations that were counter to Congressional expectations.
Court Interpretations of the 1986 Amendment
In sum, Congress believed that with the 1986 amendment it had either preserved or established the government’s ability to sue for damages those who defrauded recipients of federal funds — contractors, grantees, and others. The U.S. Supreme Court and the U.S. Court of Appeals for the District of Columbia, however, reached a different conclusion. They declined to apply the FCA to fraud against recipients of federal funds unless it could be shown that a false claim had been presented to the government or a false statement had been used to get the government to pay a claim. The leading cases espousing this view were United States ex rel. Sanders v. Allison Engine Co., Inc., 553 U.S. 662 (2008), and United States ex rel. Totten v. Bombardier Corp., 380 F.3d 448 (D.C. Cir. 2004).
Totten was a decision of the Circuit Court of Appeals for the District of Columbia. The issue before the court was whether the FCA applied to fraud against Amtrak. Deciding that Amtrak was not a government agency, the court held the FCA did not apply, and it was irrelevant that Amtrak was a recipient of federal funds.31 The deficiency in the complaint was a failure to allege presentation of a claim to the government.32 Similarly, the court ruled that §3729(a)(2) did not apply because using a false statement to get a claim paid by Amtrak was not the same as using a false statement to get a claim paid by the government, which that subsection required.33 The court rejected an argument that Amtrak’s payment, partially using federal funds, equated to payment by the government.34
In Allison, the Supreme Court ruled that the FCA’s §3729(a)(2), the “statement clause,” did not apply to a fraudulent claim presented by a subcontractor to a government prime contractor in the absence of evidence that the subcontractor intended that the false statement be material to the government’s decision to pay or approve a false claim.35 It was insufficient, without more, to show that federal funds were used to pay the false claim, even if all of the funds used were federal.36 The court relied on the language of §2729(a)(2): “knowingly makes, uses, or cause to be made or used, a false record or statement to get a false or fraudulent claim paid or approved by the [g]overnment.”37 The court emphasized that a violation of §3729(a)(2) did not require the subcontractor to have caused a false record or statement to be submitted to the government.38 The court instead focused on the subcontractor’s intent. It held that to prove a violation of §3729(a)(2) required a showing that the subcontractor submitted a false claim to the prime contractor “intending for the statement to be used by the prime contractor to get the government to pay its claim.”39 The Supreme Court reached this interpretation of the FCA without a single reference to legislative history.
The outcome in Totten is understandable if you accept that the FCA did not apply to Amtrak because it was not a government agency. No further evidence was offered in Totten that any federal agency administered the federal funds provided to Amtrak.
Understanding the outcome in Allison is more difficult. There, Allison, the subcontractor, submitted invoices to the prime contractor.40 But no evidence was offered that the prime had submitted invoices to the government.41 Did Allison turn on the relator’s42 failure to offer evidence of the prime’s invoices to the government? That would have been a relatively simple failure to fix. If more was required, what that would entail would depend on the terms of the subcontract. There are two possibilities. In the first scenario, the subcontract would condition the prime’s obligation to pay the subcontractor on the prime’s receiving payment from the government. In this scenario, the statute’s requirement to “get the false claim or fraudulent claim paid or approved by the government” would be met. This is because the subcontractor would know that being paid by the prime depended on the government accepting the subcontractor’s costs included in the prime’s voucher to the government. Thus, the subcontractor’s submission of a voucher for payment would be “intending for the statement to be used by the prime contractor to get the government to pay its claim.”
In the second scenario, the prime would pay the subcontractor without waiting for the government to pay the prime. In this scenario, it would be difficult to show that the subcontractor, in submitting its voucher to the prime, intended the prime to use its voucher to get the government to pay the subcontractor’s costs included in the prime’s voucher. This is because, having already been paid, the subcontractor might well be indifferent to whatever the government decided to do.
Does the 2009 Amendment Accomplish What Congress Intended?
With this background, what can be expected from the 2009 amendment? The first point to be made is that what Congress intended by reference to the legislative history is irrelevant if the statutory text is plain. So, we focus on the text.
First, we examine the textual changes made. Then we assess the likely effect the 2009 amendment would have made in Totten and Allison.
Presentment of a claim to the government is no longer required under the presentment clause. Nor does the statement clause require getting the government to pay or approve anything. Rather, as now written, all that is required is presentment of a false claim or making a false statement to get a claim paid. In fact, in the absence of the definition of “claim” in §3729(b)(2), the FCA would now be a general antifraud statute. The definition of a “claim,” however, does limit the application of the FCA. Section 3729(b)(2)(A)(i) restores the presentment to the government requirement. It also expands the presentment requirement of the former version to include not only an officer or employee or the United States, but also adds an agent of the United States.
Regarding the statement clause, §3729(b)(2)(ii) requires that the request or demand for money or property be:
made to a contractor, grantee, or other recipient, if the money or property is to be spent or used on the [g]overnment’s behalf or to advance a [g]overnment program or interest, and if the…[g]overnment —
(I) provides or has provided any portion of the money or property requested or demanded; [or]
(II) will reimburse such contractor, grantee, or other recipient for any portion of the money or property which is requested or demanded…. 43
Thus, when the fraud is against a nongovernment recipient, one requirement is that federal funds be used, in whole or in part, to pay the claimant, either because the recipient used federal funds to pay the claim or the recipient will, after paying the claim, obtain reimbursement from the federal government. But while necessary, that is not sufficient. It must also be shown that the money used to pay the false claim was used on the government’s behalf or to advance a government program or interest.44
Does the 2009 amendment to the FCA reverse the outcome in Totten and Allison? The Senate and House committee reports expressly stated that this was the intended result.
With Totten it is easy to see that the 2009 amendment would have reversed the outcome. As the court itself stated in rejecting the application of the FCA in a case of fraud against a recipient of federal funds, if Congress had intended such a result, all it had to do was drop the requirement of “getting the government to pay the claim.”45 The 2009 amendment did just that. The presentment and statement clauses now require only a knowingly made false presentment of a claim or false statement material to a false claim.46 In addition, the FCA’s definition of a claim was met in Totten. The government provided funds, at least in part, that were used to pay the false claim. And, the funds were paid to advance the government’s Amtrak program.47
The 2009 amendment would also have reversed the outcome in Allison.
The court in Allison concluded that the FCA did not apply to fraud on a government subcontractor because the evidence failed to show that the claimant intended the false claim to be material to the government’s decision to pay or approve the claim.48 Setting aside what evidence would have satisfied the court, the 2009 amendment has removed any such requirement by deleting from the statement clause a requirement “to get the government to pay or approve the claim.”49
In Allison, federal funds were used to pay the claim.50 And, the funds were provided to advance a government interest — a federal shipbuilding program for the United States Navy.51
Frauds Not Subject to the FCA
Accepting that the 2009 amendment has expanded the scope of the FCA and successfully overruled Allison and Totten, the FCA, nevertheless, has two significant requirements that prevent the FCA from being a general antifraud statute.52 One is that federal funds are used to pay the false claim or will be used to reimburse the payor of the false claim.53 The other is the requirement that the money or property paid to the claimant is to be spent or used for a government purpose.54 In this section, we examine how these two requirements would work in a hypothetical example.
Take, for example, frauds against colleges and universities, most of which receive federal funds, and the Allison court’s fear that a contrary interpretation to the one it adopted would lead to a “boundless” application of the FCA.55
Consider the example of a supplier of a computer to a university for the university’s performance of its contract with the government. This supplier falsely represents that the computer meets the university’s specifications. The supplier knows the representation is false, but does not know the university will use the computer to perform a contract with the government. The supplier bills the university and is paid. The university’s invoice to the government includes the costs of the computer. Is the computer supplier liable under the FCA? The answer depends on the FCA’s definition of a claim at §3729(b)(2)(A): Is the supplier’s bill to the university a “request or demand…that — (ii) is made to a contractor, grantee, or other recipient, if the money…is to be spent or used on the [g]overnment’s behalf or to advance a [g]overnment program or interest…[?]”
Simply stated, is the university’s payment to the computer supplier on behalf of the government or to advance a government program or interest? The answer is “yes.” The university knows that its payment to the computer supplier is for a computer that will be used to perform a government contract. The computer supplier does not know that, but the FCA does not require proof that the recipient of a payment from federal funds know that the payment was for a government purpose. The knowledge requirement that applies to the computer supplier is to “knowingly” make a false claim for payment or “knowingly” make a false statement material to a false claim.56 Further, it doesn’t matter whether the computer supplier is using government money previously received or will be reimbursed later for its payment to the computer supplier. The FCA applies in both cases.57 Finally, that the United States may not have title to the money when the false claim is paid is expressly made irrelevant under the 2009 amendment.58
Does the FCA’s application to a payment of a false claim depend on the university’s knowledge that the payment is for the government? The answer turns on the meaning of the statutory text — “is to be spent or used” for the government. Arguably, this language implies the university’s knowledge that payment is “on the [g]overnment’s behalf or to advance a [g]overnment program or interest,” but that meaning is not clear, and the FCA, itself, contains no express requirement that a payor have knowledge that the money is advanced for a government purpose.
Although it seems obvious in the example offered that some university official would know the computer was purchased for use in performing a government contract, the question is important in less obvious situations for two reasons. First, if knowledge of advancing a government purpose, is required in addition to the fact of advancing a government purpose, then the government or a relator will have to provide proof. Secondly, the availability of such proof will diminish the further down the supply chain subcontracts go and as the purchases of goods and services are made for purposes other than just a government contract. Suppose, for example, the university’s purchase of the computer was for purposes other than just performing a government contract. Or, suppose the false claim was made by a vendor of computer parts to the computer supplier. In this latter example, payment to the parts vendor advances a government program, but neither the computer supplier nor part vendor are aware of the government program.
Whether the FCA requires that a payor know of the government purpose, the FCA’s reach is nevertheless limited as just described. The government is still required to prove that the federal money or property received as a result of the false claim was paid on the government’s behalf or to advance a government program or interest. Under what circumstances, however, would payment of a false claim using federal funds not be on the government’s behalf or to advance a government program or interest?
Consider the previous example, but change it such that the university buys the computer for a professor’s general use at the university and having no use for a federal contract, program, or project. The FCA would not apply. In short, and in the context of a government contract, the FCA does not apply to a false claim made to a party who is not a higher-tier subcontractor or the prime contractor.
This outcome achieves a similar result as expressly provided by the FCA in the case of a civil servant who uses his or her salary to buy a product for personal use. The statute expressly excludes fraud against a civil servant whose employment compensation is from federal funds.59 Thus, if a seller of a computer for the civil servant’s personal use defrauds the civil servant who uses government compensation to pay the claim, the FCA does not apply by the express terms of the statute. But the FCA would not apply in any event. This is because the use of federal funds is not on the government’s behalf and does not advance a government program or interest.
Whether a requirement of knowledge by the payor of a false claim about the purpose of the payment is implied, the government must in any event prove the fact of the use of federal funds.60 And, if the government seeks to impose triple damage liability, in addition to the civil penalty, it will have to prove the amount of federal funds used.61
The 2009 amendment to the FCA achieves the result intended by its authors. The act now applies to frauds against any payor who uses federal funds, at least in part, to pay a false claim if the payment of federal funds was on behalf of the government or to advance a government program or interest. The government does not have to prove that the maker of the false claim or statement knew that the claim or statement would be material to the government’s decision to pay.
1 31 U.S.C. §3729(a)(1) (Supp. IV 2010).
2 S. Rep. No. 111-10 (2009) at 4, reprinted in 2009 U.S.C.A.A.N. 433.
3 S. Rep. No. 99-345 (1986) at 1, reprinted in 1986 U.S.C.A.A.N. 5266.
4 Fraud Enforcement and Recovery Act of 2009, Pub. L. No. 111-21, 2009 U.S.C.C.A.N. (123 Stat.) 1617, 1621-1625, codified as amended at 31 U.S.C. §§3729-3733 (Supp. IV 2010).
5 S. Rep. No. 111-10 at 10-12, 2009 U.S.C.A.A.N. 430, 438-39.
7 Exxon Mobil Corp. v. Allapattah Services, Inc., 545 U.S. 546, 568 (2005).
8 The amount of the civil penalty is adjusted per the Federal Civil Penalties Inflation Adjustment Act of 1990 (28 U.S.C. §2461 (Supp. IV 2010)), 31 U.S.C. §2729(1)(1).
9 Pub. L. No. 97-258, 1982 U.S.C.A.A.N. (96 Stat.) 978-79, codified as amended at 31 U.S.C. §§3729-3731 (1982).
10 H.R. Rep. No. 97-651 at 1 (1982), reprinted in 1982 U.S.C.A.A.N. 1895.
11 Pub. L. No. 97-258.
13 See id.
14 Pub. L. No. 99-562, 1986 U.S.C.A.A.N. (100 Stat.) 3153, codified as amended at 31 U.S.C. §§2729-3733 (2006).
16 S. Rep. No. 99-345 at 10; 1986 U.S.C.A.A.N. at 5275.
18 S. Rep. No. 99-345 at 21; 1986 U.S.C.A.A.N. at 5286.
19 S. Rep. No. 99-345 at 21-22; 1986 U.S.C.A.A.N. at 5286-86.
20 S. Rep. No. 99-345 at 22; 1986 U.S.C.A.A.N. at 5287.
22 Azzarelli, 647 F.2d at 759.
23 Id. at 761.
25 Id. at 760.
26 Id. at 761.
27 Id. at 761-62.
28 S. Rep. 99-345 at 22; 1986 U.S.C.A.A.N. at 5287.
29 Pub. L. No. 99-562 (emphasis added).
30 S. Rep. No. 99-345 (1986) at 17, reprinted in 1986 U.S.C.A.A.N. 5266, 5282.
31 Totten, 380 F.3d at 490.
32 Id. at 491.
33 Id. at 498.
35 United States ex rel. Sanders v. Allison Engine Co., Inc., 553 U.S. 662, 665 (2008).
37 Id. at 668-69 (emphasis added).
38 Id. at 671.
40 Id. at 666.
41 Id. at 667.
42 The FCA permits third parties in certain circumstance to maintain actions. 31 U.S.C. §3730(b) (Supp. IV 2010).
43 31 U.S.C. §3729(b)(2)(ii) (Supp. IV 2010).
45 United States ex rel. Totten v. Bombardier Corp., 380 F.3d 488, 498-99 (D.C. Cir. 2004).
46 31 U.S.C. §3729 (a)(1)(A) and (B) (Supp. IV 2010).
47 31 U.S.C. §3729(b)(2)(A) (Supp. IV 2010); see also 49 U.S.C. §24301 (addressing the government’s Amtrak program).
48 United States ex rel. Sanders v. Allison Engine Co., Inc., 553 U.S. 662, 668-69 (2008).
49 31 U.S.C. §3729(a)(1)(B) (Supp. IV 2010).
50 Allison, 553 U.S. at 666.
52 A different conclusion is reached in Justin P. Tschoepe, Comment: A Fraud Against One Is Apparently a Fraud Against All: The Fraud Enforcement Act and Recovery Act’s Unprecedented Expansion of Liability Under the False Claims Act, 47 Hous. L. Rev. 741 (2010). The author concludes that the FCA has become an all purpose antifraud statute that is almost boundless. Id. at 745.
53 31 U.S.C. §3729(b)(2)(A)(ii)(I) and (II) (Supp. IV 2010).
54 31 U.S.C. §3729(b)(2)(A)(ii) (Supp. IV 2010).
55 Allison, 553 U.S. at 669.
56 31 U.S.C. §3729(a)(1)(A) and (B) (Supp. IV 2010).
57 31 U.S.C. §3729(b)(2)(A)(ii)(I) and (II) (Supp. IV 2010).
58 31 U.S.C. §3729(b)(2)(A) (Supp. IV 2010).
59 31 U.S.C. §3729(b)(2)(B) (Supp. IV 2010).
61 31 U.S.C. §3729(a)(1).
Jerald D. Stubbs is the chief counsel at the National Aeronautics and Space Administration’s Kennedy Space Center (NASA-KSC). His responsibilities include advising officials at NASA-KSC on False Claims Act matters. The opinions expressed are his own and do not necessarily represent the National Aeronautics and Space Administration.