Identification, Prevention, and Remedies for False Claims in Highway Improvement Contracting (2011)

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54 jects. The California case law is discussed in both treatises.277 This includes cases involving alleged false claims arising in a construction context, such as the disadvantaged business enterprise fraud issues in- volved in Southern California Rapid Transit District v. Superior Court (Laster), the cross-claims involved in Stacy & Witbeck, Inc. v. City and County of San Francisco, and the contract arbitration clause issues in County of Solano v. Lionsgate Corp.278 One California case, decided prior to the 2009 en- actment of the FERA amendments to the Federal FCA and the 2009 amendments to the California FCA, raises potentially troubling issues regarding the continued applicability of the California Act to certain types of situations that might typically arise on public construction contracts. In Fassberg Construc- tion Co. v. Housing Authority of the City of Los Ange- les, a case decided in 2007, the California Court of Appeal for the Second District was confronted with a variety of false claims issues.279 A contractor sued a municipal housing authority for alleged breach of con- tract and alleged violation of statutory require- ments for release of contract retainages. The housing authority filed a cross-complaint alleging breach of contract and also alleging violations of the California FCA. Matters considered by the court as false claims issues included whether each request by the contrac- tor for a progress payment was a "claim," whether weekly payrolls submitted by the contractor to show compliance with pay rate requirements were "claims," whether the authority could recover under- paid wages as damages under the Act, and whether requests or proposals for change orders submitted by the contractor for contract change orders were "claims" under provisions of the California FCA. The Court of Appeal decision in Fassberg held that change order proposals requesting contract price ad- justments may be false records or statements but are not "claims" under the provisions of the California FCA. The court stated that if a contractor presents a false change order proposal and a change order is issued in reliance thereof, each request for progress payment of amounts payable under the change order is a false claim under the California FCA but concluded that change order proposals were not claims. This restric- tive interpretation runs contrary to numerous pre- vious interpretations of false claim provisions and 277 See SYLVIA, supra note 7, at 899–916; and Sink & Pages, supra note 125, at 254–68. 278 S. Cal. Rapid Transit Dist. v. Superior Court (Laster, 30 Cal. App. 4th 713, 36 Cal. Rptr. 2d 665 (1994)); Stacy & Witbeck, Inc. v. City and County of S.F., 47 Cal. App. 4th 1, 54 Cal. Rptr. 2d 530 (1996); and County of Solano v. Lionsgate Corp., 126 Cal. App. 4th 741, 24 Cal. Rptr. 3d 362 (2005), cited and discussed in Sink & Pages, supra note 125, at 263 nn.55–56 and 267 n.73. 279 Fassberg Constr. Co. v. Hous. Auth. of the City of L.A., 151 Cal. App. 4th 267, 152 Cal. App. 4th 720, 60 Cal. Rptr. 375 (Cal. Ct. App. 2d Dist. 2007). decisions that recognize false claim liability for false requests for equitable adjustments and extra com- pensation. The court further held that weekly payroll reports stating classification and hourly wages paid to each employee were also not "claims" under the provisions of the California FCA since they were not requests or demands for money, but records required to be sub- mitted or used to support requests for contract pay- ments, irrespective of the contractor's certification confirming the information was correct and each worker was paid the applicable wage rate and bene- fits. This restrictive interpretation also runs contrary to established precedent establishing false claim liabil- ity for false certifications. We await further judicial decisions in this area since California has implemented significant changes to its FCA similar to the FERA provisions, effective January 1, 2010. I. Does FERA Warrant Changes to State FCAs? To the extent that there is case law interpreting state FCAs, state courts have tended to look to fed- eral judicial precedents interpreting the Federal FCA for guidance in interpreting state FCAs. Given the increasingly restrictive federal case law, which led Congress to include major amendments to the Federal FCA in the 2009 FERA legislation to overturn a num- ber of recent federal court decisions discussed in Sec- tion II of this digest, this would appear to pose a sig- nificant potential problem for states whose FCAs were enacted prior to 2009 and whose language tracks the old version of the Federal FCA rather than the cur- rent version of the Federal FCA as amended by FERA in early 2009. Those states seeking recoveries under outdated state FCAs may find their courts following the restrictive federal judicial interpretations of the old language modeled on the pre-FERA version of the Federal FCA.280 SECTION XIV. STATE FALSE STATEMENT STATUTES A. Overview of Applicable State Law Not every state in the United States has enacted a state equivalent of the Federal FCA. At least 16 states that do not have such statutes have, however, enacted various versions of false statement statutes. We will focus here on states that do not have an FCA, and have only enacted a false statement statute. Some of the states that have enacted state FCAs have also enacted state false statement acts, but for the most part, those will not be considered here as the FCAs cover the matters of greatest relevance to this digest.281 Some other states have enacted Medi- 280 See also discussion under item 7 in § XVII of this di- gest, infra. 281 Arizona, Illinois, Maine, Mississippi, Nevada, New

55 caid-specific false statement statutes, which will not be considered here because they would not be applicable to situations involving highway or bridge construc- tion projects.282 The state false statement statutes take varying ap- proaches to the same basic objective: prohibiting per- sons from submitting false statements to state or municipal officials in order to obtain payments or other things of value from them. Most of these stat- utes impose criminal penalties for the prohibited conduct, although the level of severity that these statutes assign to the prohibited conduct and the level of severity of the fines or sentences of imprison- ment that may be imposed upon conviction vary con- siderably. These statutes range from petty offenses up to felonies carrying sentences of up to 5 years’ impris- onment, although the majority of them appear to treat false statements as misdemeanors.283 Some states, such as Alabama, Colorado, Georgia, Maryland, Missouri, Pennsylvania, and West Virginia, have multiple false statement statutes covering multiple levels of severity depending upon the specific facts involved. Arizona, Illinois, and Ohio also make persons civilly liable for damages for submitting false statements to government officials.284 The Illinois statute goes so far as to make such persons liable for treble damages or a fine of up to $25,000, whichever is greater—but the statute is only applicable to false statements submit- ted to units of local governments and school districts and does not appear on its face to be applicable to false statements submitted to state agencies.285 Three states, Louisiana, Pennsylvania, and West Virginia, make the submission of false statements to state officials or agencies, or conviction of crimes in- volving false statements grounds for suspension or de- barment from state contracting.286 Two of those same states, Louisiana and West Virginia, also make the sub- mission of false statements to state officials grounds for revocation of the licenses of professional engineers or for other disciplinary action against them.287 York, Utah, and Virginia appear to have both false claims statutes and false statement statutes. 282 Georgia, Illinois, Maryland, Missouri, West Virginia, and Wisconsin have enacted Medicaid false statement stat- utes 283 Cf., e.g., COLO. REV. STAT. ANN. §18-8-504 (False swearing, Class 1 Petty Offense), with Maryland Code State Finance and Procurement § 14-308, MBE fraud, fel- ony, fine of up to $20,000, imprisonment of up to 5 years, or both, and KY. REV. STAT. § 523.030, Perjury in the second degree, Class A misdemeanor. 284 Cf. ARIZ. REV. STAT. § 10-1631 with 730 ILL. COMP. STAT. 5/5-9-1.3 and OHIO REV. CODE § 2921.13. 285 730 ILL. COMP. STAT. 5/5-9-1.3. 286 LA. REV. STAT. ANN. 48:295.2, 62 PA. CONS. STAT. ANN. § 531, W. VA. CODE ANN. § 5A-3-33d. 287 LA. REV. STAT. ANN. 37:698, and W. VA. CODE ANN. § 30-13-21. B. Applicability and Relevance to False Claims In states that lack FCAs but have false statements statutes, state transportation officials might consider attempting to use the false statement statutes to seek at least some form of redress for the submission of false claims or the perpetration of fraud upon state highway or bridge construction projects. As noted above, in at least two states, Louisiana and West Vir- ginia, these laws have real teeth, and can lead to penal- ties such as debarment of contractors and revocation of professional engineering licenses. The laws in at least some other states offer the potential for criminal convictions at the felony level. In general terms, how- ever, most false statement statutes are distinctly infe- rior to false claims statutes in terms of the prospec- tive remedies that they offer to state transportation agencies seeking redress for false claims and fraud.

56 STATE FALSE STATEMENT STATUTES STATE CITATION DESCRIPTION Alabama Ala. Code § 13A-10-109 Unsworn falsification to authorities—submits false written statement to agency in application for pecuniary benefit—C misdemeanor. Alabama Ala. Code § 13A-9-45 Falsifying business records—with intent to defraud, makes false entry, or alters, omits, or prevents true entry in business records of an enterprise—B misdemeanor. Alabama Ala. Code § 13A-9-12 Offering false instrument for recording—knowing that writ- ten instrument is false and with intent to defraud, presents to public employee to become part of public records—A misde- meanor. Alabama Ala. Code § 13A-9-3 Forgery second degree—with intent to defraud, falsely makes a written instrument calculated to become a public record—C felony Arizona Ariz. Rev. Stat. § 10-1631 Civil liability for false statements—corporate officers, direc- tors, or agents making a material false statement are person- ally liable for all resulting damages—action must be com- menced within 2 years after discovery and 6 years after false statement made. Colorado Colo. Rev. Stat. Ann. § 18-8- 504 False swearing—knowingly makes a materially false state- ment under an oath required or authorized by law—Class 1 petty offense. Colorado Colo. Rev. Stat. Ann. § 18-8- 503 Perjury second degree—with intent to mislead public servant in performance of duty, makes materially false statement under an oath required or authorized by law—Class 1 mis- demeanor. Georgia Ga. Code Ann. § 16-10-20 False statements and writings; concealment of facts— knowingly and willfully makes a false or fraudulent state- ment in any matter within the jurisdiction of any state agency—$1,000 fine, up to 5 years in prison, or both. Georgia Ga. Code Ann. § 16-10-71 False swearing—knowingly and willfully makes a false statement purporting to acknowledge an oath or affirmation in any matter other than a judicial proceeding—$1,000 fine, up to 5 years in prison, or both. Georgia Ga. Code Ann. § 16-8-3 Theft by deception—obtains property by any deceitful means or artful practice with intention of depriving the owner of the property. Georgia Ga. Code Ann. § 16-9-50 Deceptive business practice—knowingly falsely determines or records any quantity, sells or delivers less than the repre- sented quality or quantity of a commodity, or takes more than the represented quantity—misdemeanor.

57 Illinois 730 Ill. Comp. Stat. 5/5-9-1.3 Fines for offenses involving theft, deceptive practices, and offenses against units of local governments or school dis- tricts—fine of the greater of $25,000 or up to treble the value of the property or loss involved. Iowa Iowa Code Ann. § 12B.14 False statements or reports relating to security of state reve- nue. Kentucky Ky. Rev. Stat. Ann. § 523.030 Perjury second degree—makes a material false statement in a subscribed written instrument for which an oath required with intent to mislead a public servant in performance of offi- cial functions—A misdemeanor. Louisiana La. Rev. Stat. Ann. § 48:295.2 Authority to debar or suspend—contractor or consultant may be suspended or debarred for causes including fraud in ob- taining a government contract, violation of antitrust statutes, falsification or destruction of records or making false state- ments, willful failure to perform obligations for D/M/WBE participation, use of substandard materials or failure to fur- nish or install materials in accordance with contract, or sub- mission of a false certification. Nebraska Neb. Rev. Stat. § 23-135.01 Claims; false statements or representations; penalties—filing a claim against a county knowingly containing a false state- ment of a material fact, or obtaining money from a county if the claim therefore was based on a false statement—if amount exceeds $1,000, Class IV felony. North Dakota N.D. Cent. Code § 12.1-11-02 False statements—in a governmental matter, makes a mate- rial false written statement, or omits information to make a false impression in a written application for a pecuniary bene- fit, or knowingly submits a materially false sample or speci- men—A misdemeanor. Ohio Ohio Rev. Code Ann. § 2921.13 Falsification—knowingly makes a false statement with pur- pose to mislead a public official in performing official func- tions, or to secure issuance by a governmental agency of a license, release, or provider agreement—1st degree misde- meanor—person who violates is also liable for civil damages plus attorney's fees, court costs, and expenses. Pennsylvania 62 Pa. Cons. Stat. Ann. § 531 Debarment or suspension—purchasing agency can debar a person from contracts for falsification or destruction of re- cords, making false statements, or fraud associated with ob- taining, attempting to obtain, or performing a public contract.