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

Below is the uncorrected machine-read text of this chapter, intended to provide our own search engines and external engines with highly rich, chapter-representative searchable text of each book. Because it is UNCORRECTED material, please consider the following text as a useful but insufficient proxy for the authoritative book pages.

7 cases involving fraud against the government.25 This brings the total in Federal FCA recoveries since 1986, when Congress substantially strengthened the FCA, to more than $24 billion. In FY 2009, health care fraud recoveries reached $1.6 billion, two-thirds of the year's total. The largest health care recoveries came from the pharmaceutical and medical device industries, which accounted for $866.7 million in settlements. Procure- ment fraud accounted for a quarter of the fiscal year recoveries, with $608 million in settlements and judg- ments, including $422 million attributable to Depart- ment of Defense contracts.26 While $2.4 billion in recov- eries in a single year may sound impressive to start with, it should also be noted that the DOJ numbers do not include either criminal recoveries (for example, the Pfizer criminal case involved $1billion in FCA recoveries and $1.3 billion in additional criminal penalties), or money distributed to the states in settlements. If in- cluded, the criminal and state recoveries would raise the total recoveries to more than $5.6 billion in a single year.27 For reasons discussed later in this digest, use of the FCA may be more challenging in the construction in- dustry context than in other industries. The potential for pursuing increased FCA recoveries in the construc- tion context is significant, however, and appears to war- rant the focused attention of managers of state trans- portation agencies. SECTION II. 2009 AMENDMENTS REDEFINE THE FALSE CLAIMS ACT, 31 U.S.C. § 3729 During 2009, in response to a major recession, Con- gress authorized major new federal expenditures, including surface transportation projects, as an eco- nomic stimulus, and sought to enhance the protection of such expenditures against fraud. As part of this ef- fort, Congress enacted comprehensive amendments to the FCA.28 Both the plain terms of the 2009 amend- ments and express statements in legislative history indicate clearly that Congress was responding to, and intended to overrule, recent judicial decisions, including a U.S. Supreme Court decision, which members of Con- gress characterized as being contrary to the legislative intent of the Act. Background: Judicial Interpretation of False Claims Act, 1998–2008 Between 1998 and 2008, a series of federal court decisions imposed increasingly restrictive judicial in- 25 Taxpayers Against Fraud, News Stories, Nov. 24, 2009, available online at http://www.taf.org/whistle264.htm (last accessed June 12, 2010); and http://www.iaipsig.org/media/mticle_2.html (last accessed July 6, 201 0). 26 U.S. Department of Justice Statistics Overview, note 1, supra. 27 Taxpayers Against Fraud, note 25, supra. 28 3 1 U.S.C. §§ 3729 et seq. terpretations upon the language of the False Claims Act. In 1998, the U.S. Court of Appeals for the 10th Circuit dismissed United State ex rel. Aakhus v. Dyn- corp, Inc., despite evidence of conversion of govern- ment assets, on the grounds that the government failed to prove that a written receipt had been provided for the property, based upon certain statutory language dating back to 1863 that had not previously been in- terpreted as requiring such proof.29 In 2004, the U.S. Court of Appeals for the D.C. Circuit held in United States ex rel. Totten v. Bombardier Corp. that, notwith- standing evidence showing a false claim involving a fed- erally-funded project, and notwithstanding a broad statutory definition of the term "claim," the govern- ment could not recover damages under the Act where the funds in question had been disbursed by a third party, interpreting the Act to require proof of the pre- sentment of a claim directly to the federal government itself, rather than to a government grantee or contrac- tor. The U.S. Supreme Court denied certiorari in that case in 2005.30 In 2006, the U.S. District Court for the Eastern District of Virginia ruled in United States ex rel. DRC, Inc. v. Custer Battles, LLC, a case involving false claims by a contractor on a project administered by a U.S. federal agency with funding which the U.S. had provided to the government of Iraq, that damages could not be recovered under the Act because its scope did not extend to funds administered, but no longer directly owned, by the U.S. government itself, as opposed to a grantee or recipient.31 This series of judicial interpretations of the FCA culminated in a June 9, 2008, ruling by the U.S. Su- preme Court, in Allison Engine Co. Inc. v. United States ex rel. Sanders, a case involving a false claim by a subcontractor against a contractor on a U.S. Navy shipbuilding project that increased the cost of the project.32 In that case, the Supreme Court's decision, authored by Justice Samuel Alita, interpreted the lan- guage of the Act to authorize recovery only if the gov- ernment could show, by direct evidence, that the defen- dant intended the false statement or record to be material to the government's decision to pay or ap- prove the false claim itself. Alternatively, the govern- ment could show that the defendants had knowingly, intentionally, and overtly agreed to make use of a false statement or record as a material element in conspir- ing to get the U.S. Government itself to pay what the defendants knew to be a false claim. Justice Alita's opinion required such proof, as opposed to evidence 29 United States ex rel. Aakhus v. Dyncorp, Inc., 136 F.3d 676 (1Oth Cir. 1998). 30 United States ex rel. Totten v. Bombardier Corp., 380 F.3d 488 (D.C. Cir. 2004), cert. denied, 544 U.S. 1032 (2005). 31 United States ex rel. DRC, Inc. v. Custer Battles, LLC, 376 F. Supp. 2d 617 (E.D. Va. 2006). 32 Allison Engine Co. Inc. v. United States ex rel. Sand- ers, 553 U.S. 662, 128 S. Ct. 2123, 170 L. Ed. 2d 1030 (2008); on remand, 667 F. Supp. 2d 747 (S.D. Ohio 2009).

8 that the subcontractor had simply defrauded the con- tractor in a way that had the effect of increasing the cost of the project to the government indirectly. Through this interpretation, the court imposed by im- plication intent requirements not expressly stated in the language of the Act.33 Collectively, these judicial interpretations of the FCA, particularly Totten and the Supreme Court's deci- sion in Allison Engine, reduced the effectiveness of the Act in protecting government projects and pro- grams against false claims and fraud. Private qui tam relators in Medicaid cases against pharmaceutical com- panies continued to make recoveries. In cases involving federally-funded projects, however, judicial interpreta- tions imposed a growing set of new hurdles for prose- cutors and new defenses for contractors. These inter- pretations often relied upon reinterpretation of longstanding statutory language, or reached beyond the Act's express statutory language. The judicial rulings created crucial gaps in the False Claims Act's coverage of the kinds of false claims and fraud routinely experienced by government programs. Allison Engine made it nearly impossible for either the government or qui tam relators to recover any damages for false claims perpetrated by subcontrac- tors against contractors on government projects, even if such false claims involved major elements of work and clearly increased the costs of the project to the government and taxpayers. Allison required proof of a specific and overt intent upon the part of the sub- contractors that the false claims be approved and paid directly by the government itself, and not just by the firm who was carrying out the government's project under contract and being compensated by government payments using taxpayers' funds. Totten made it im- possible for either the government or the recipients of federal funding and grants, including quasi- governmental entities such as Amtrak, to recover for false claims presented to a federal-aid funding or grant recipient or contractor, as opposed to the federal gov- ernment itself. Even where both federal funding and a federal government agency were involved, Custer Bat- tles put protection of the federal funding beyond the scope of the FCA the moment that the funding passed from the hands of the federal government into the hands of a grantee. The cumulative effect of these judicial precedents was to diminish greatly the Act's reach, scope and utility in protecting federally funded programs against false claims, fraud, and abuse. By the summer of 2008, the continued effectiveness of the FCA as an enforce- ment tool for protecting federally-funded programs against false claims and fraud was questionable at best. 33 Id. Congressional Enactment of FERA Amendments to False Claims Act, 2009 In May of 2009, Congress enacted FERA.34 FERA re- sulted in a number of changes in federal law, including but not limited to significant amendments to the FCA.35 It is not unusual for the federal judiciary to identify issues of statutory drafting or administrative interpretation during the litigation process, and for Congress to address such issues when crafting statutory amendments. This may provide part of the explana- tion for this legislation. The legislative history of FERA indicates, however, that Congress considered itself to be doing more than merely adjusting issues of legislative drafting or administrative interpretation. Both the express language of FERA and its legisla- tive history clearly indicated the intent of Congress to override the Supreme Court's decision in Allison En- gine and the other cases referenced above. Congress enti- tled Section 4 of FERA, the portion amending the FCA, as "Clarification to the False Claims Act to Reflect the Original Intent of the Law." Congress sought to make one of FERA's key amendments to the FCA retroactive to 2 days prior to the Court's decision in Allison En- gine.36 Congress also made a number of other changes in 34 Fraud Enforcement and Recovery Act of 2009, Pub. L. No. 111-21, 123 Stat 1617, May 20, 2009 (FERA); text available online at http://www.gpo.gov/fdsys/pkg/PLAW-111 publ21/pdf (last accessed June 12, 2010). 35 Aside from amending the FCA, FERA also amended the definition of the terms "financial institution" and "mortgage lending business" in 18 U.S.C. §§ 20 and 27 to include mortgage lending businesses and mortgage brokers, broadening the applicability of multiple federal criminal statutes including 18 U.S.C. §§ 215, 225, 1005, 1341, 1343, and 1344; amended 18 U.S.C. § 1014, the federal false statements in mortgage applications statute, to make it a federal crime to make a materially false statement or to willfully overvalue a property in order to influence any ac- tion by a mortgage lending business; amended 18 U.S.C. § 1031, the federal major fraud statute, to cover frauds affect- ing federal economic relief and Troubled Asset Relief Pro- gram (TARP) funds; amended 18 U.S.C. §1348, the federal securities fraud statute, to include commodities fraud; amended 18 U.S.C. §§ 1956 and 1957, the federal criminal money laundering statute, to make clear that the proceeds of such activity include gross receipts and not just profits, overturning a 2008 U.S. Supreme Court decision, United States v. Santos, 128 S. Ct. 2020 (2008); amended 18 U.S.C. § 1956(a)(2) of the federal money laundering statute to make it a federal crime for individuals to transfer or transport money in and out of the U.S. to evade taxes; and appropriated $165 million per year for FY 2010 and 2011 to the U.S. Attorney General to fund investigators and prosecutors for mortgage fraud, securities fraud, and cases involving federal economic assistance. 36 Allison Engine, imposing a restrictive interpretation upon the presentment requirements then set forth in 31 U.S.C. § 3729(a)(2), was decided on June 9, 2008. FERA Section 4(t) makes the deletion of that statutory language from the former § 3729(a)(2), and the substitution of the § 3729(a)(1)(B) requirement that the false record or claim merely be "material to a false claim," effective retroactive

9 the language of the Act, which, at least on a prospective basis, overturned the judicial interpretations of the Act discussed above. In the legislative history of FERA, key legislators ex- pressed clearly, directly, and specifically the congres- sional intent to overrule Allison Engine and the other cases discussed above. Both Senator Patrick Leahy, the Chair of the Senate Judiciary Committee, and Congressman Howard Berman, the Vice Chair of the House Judiciary Committee, made express reference to Allison Engine in their on-the-record explanations of FERA's amendments to the FCA. Senator Leahy did so in the Senate Judiciary Committee's Report on S. 386, the bill which became FERA, stating that "[t]he effec- tiveness of the False Claims Act has recently been undermined by court decisions, " including Allison Engine and Totten, and that FERA "amends the FCA to clarify and correct erroneous interpretations of the law" in those cases which were "contrary to Congress's original intent in passing the law.'37 Similarly, in ex- tended remarks offered to the House 2 days prior to the enactment of FERA, Congressman Berman stated that "some courts have incorrectly grafted limitations to the reach of the Act, leaving billions of dollars vul- nerable to fraud," and that the "primary impetus for the current corrective legislation is to reverse these unacceptable limitations and restore the False Claims Act to its original status as the protector of all Gov- ernment funds or property.''38 It should also be noted that there was bipartisan support for the FERA amendments to the FCA overturning Allison Engine, with the sponsors for S. 386 including senators from both the Democratic and Republican parties.39 During an interview with the authors of this di- gest, a USDOT attorney directly involved in the han- dling of Federal FCA litigation characterized the FERA amendments, in words and substance, as simply put- to June 7, 2008, 2 days prior to the date of the Allison En- gine decision. The retroactive application of the amendment was, however, subsequently held on remand in the Allison case to be a violation of the Constitution's prohibition against ex post facto penalties; United States v. Allison Engine Co., 667 F. Supp. 2d 747 (S.D. Ohio 2009). 37 S. REP. No. 111-10, at 4 and 10–12 (2009); available online at http://frwebgate.access.gpo.gov/cgi-bin/getdoc.cgi?dbname=11 1_cong_reports&docid=f:sr010.pdf (last accessed June 12, 2010). 38 CONG. REC. E1295–E1300, at E1296 (daily ed. June 3, 2009) (statement of Rep. Berman); available online via http://www.gpoaccess.gov/crecord/advanced.html; on ad- vanced search page, check boxes for "2009 CR, Vol. 155" and "Extension of Remarks," specific date on 06/03/2009, search E1295; on results page, click on the underlined let- ters “pdf” under hit no. 3, Fraud Enforcement and Recovery Act of 2009 (last accessed on June 12, 2010). 39 S. REP. No. 111-10, at l (2009)—sponsors and cospon- sors of S. 386 included Senators Leahy (D-VT), Grassley (R-IA), Kaufman (D-DE), Klobuchar (D-MN) and Schumer (D-NY); available online, see note 36 supra. ting the government back in the same position in FCA litigation that government attorneys believed that they had occupied prior to the issuance of the Su- preme Court's decision in Allison Engine.40 While sup- porting this assessment, a careful review of the provi- sions of FERA indicates that Congress pursued this objective with sufficient vigor that FERA may go beyond reversing the judicial interpretations of the past dec- ade to strengthen the hand of government attorneys in pursuing FCA remedies. Summary of FERA Amendments to False Claims Act FERA makes significant amendments to the FCA. Sec- tion 4 of FERA, "Clarification to the False Claims Act to Reflect the Original Intent of the Law," includes six subsections, (a) through (f). These are discussed be- low, but may be summarized as follows. A. FERA Section 4(a), "Clarification of the False Claims Act," amends 31 U.S.C. § 3729, "Liability For Certain Acts," setting forth the basic liability provisions of that Act. B. FERA Section 4(b), "Intervention by the Govern- ment," amends 31 U.S.C. § 3731(c), "False Claims Proce- dure," concerning federal intervention in cases com- menced by private qui tam relators under the FCA. C. FERA Section 4(c), "Civil Investigative Demands," amends 31 U.S.C. § 3733, authorizing the Attorney Gen- eral of the United States to present civil investigative demands prior to undertaking civil actions for damages under the FCA. D. FERA Section 4(d), "Relief from Retaliatory Ac- tions," amends 31 U.S.C. § 3730(h), protecting private qui tam relators against retaliatory actions for filing civil actions under the FCA. E. FERA Section 4(e), "False Claims Jurisdiction," amends 31U.S.C. § 3732, governing federal judicial ju- risdiction over actions under 31 U.S.C. § 3730 of the FCA. F. FERA Section 4(f), "Effective Date and Applica- tion," makes 31 U.S.C. § 3729(a)(1)(B) as amended effec- tive retroactively on and from June 7, 2008; and makes 31U.S.C. §§ 3731(b), 3732, and 3733 as amended effective on and from the date of FERA's enactment, May 20, 2009. Basic Liability Provisions of § 3729 following FERA Section 4(a)(1) Amendments Section 4(a) of FERA amends 31 U.S.C. § 3729, "Li- ability for Certain Acts," extensively. It deletes and replaces in its entirety subsection (a), setting forth the 40 Interview with Peter J. Plocki, Deputy Assistant Gen- eral Counsel for Litigation, Office of the General Counsel, USDOT, i n Washington, D.C. (Dec. 2, 2009). Also present during this interview was Thomas F. Mahoney, Senior At- torney, Litigation Division, Office of the General Counsel, USDOT, who concurred in Mr. Plocki's views.

10 specific elements required to establish liability; deletes the prior subsections (b) and (c) in their entirety, replacing them with a new subsection (b), defining the terms used in subsection (a) and other provisions of the Act; redesignates former subsections (d) and (e) to be subsections (c) and (d); and makes a technical amendment to the redesignated subsection (c). As amended by FERA Section 4(a )(1), 31 U.S.C. § 3729(a)(1) imposes civil false claims liability, including treble damages plus a civil penalty, upon any person who: A. Knowingly presents, or causes to be presented, a false or fraudulent claim for payment or approval; B. Knowingly makes, uses, or causes to be made or used, a false record or statement material to a false or fraudulent claim; C. Conspires to commit a violation of § 3729(a)(1)(A), (B), (D), (E), (F), or (G); D. Has possession, custody, or control of property or money used, or to be used, by the Government and knowingly delivers, or causes to be delivered, less than all of that money or property; E. Is authorized to make or deliver a document certi- fying receipt of property used, or to be used, by the Government and, intending to defraud the Govern- ment, makes or delivers the receipt without com- pletely knowing that the information on the receipt is true; F. Knowingly buys, or receives as a pledge o f an obli- gation or debt, public property from an officer or em- ployee of the Government, or a member of the Armed Forces, who lawfully may not sell or pledge property; or G. Knowingly makes, uses, or causes to be made or used, a false record or statement material to an obliga- tion to pay or transmit money or property to the Government, or knowingly conceals or knowingly and improperly avoids or decreases an obligation to pay or transmit money or property to the Government (some- times referred to as a "reverse false claim"). As amended by FERA Section 4(a)(1), 31 U.S.C. § 3729(a)(3) also makes any person violating § 3729(a) liable to the U.S. Government for the costs of a civil ac- tion brought to recover such damages. As amended by FERA Section 4(a)(1), 31U.S.C. § 3729(a)(2) authorizes courts to reduce to double, rather than treble, damages the liability of any person committing a violation who is not subject to pending criminal charges, furnishes federal officials with all known information about the violation within 30 days after first obtaining it, and cooperates fully with the government investigation. As amended by FERA Section 4(a)(1), 31 U.S.C. § 3729(b) defines the terms "knowing," "knowingly," "claim," "obligation," and "material" in ways that must be considered in litigating FCA cases. FERA Makes Major Substantive Changes in False Claims Act Liability Provisions Upon close examination, it is clear that the FERA Section 4(a)(1) amendments have made major and sig- nificant substantive changes to the former liability provisions of the Act, in ways that overrule prior judi- cial interpretations of the former liability provision and strengthen the ability of government officials and qui tam relators to impose liability upon violators. One of the key issues that arose in judicial interpre- tations of the former liability provision, particularly in Allison Engine, was the so-called "presentment" re- quirement of § 3729(a)(1). Prior to FERA, the FCA re- quired that a false claim be presented "to an officer or employee of the United States Government or a member of the Armed Forces of the United States." In Allison Engine,41 which involved an alleged false claim presented by a subcontractor to a contractor on a U.S. Navy shipbuilding project, the U.S. Supreme Court interpreted this language narrowly to require that, in order to establish liability, the government or a qui tam relator would have to prove that the defendant submitted a false claim with the intention to get the false claim paid by the government, and that it was not sufficient to show that the false claim had been pre- sented to a grantee or contractor of the government on a government-funded project. The statute included no express statement of such a requirement for proof of intent, and the Court's holding was based primarily upon what was then the § 3729(a)(2) provision that a false claim be made or used "to get a false or fraudu- lent claim paid or approved by the Government." As evidence regarding the actual and specific intentions of a subcontractor in submitting any particular bill or voucher would be extremely difficult to obtain, the holding in Allison Engine made it exceptionally diffi- cult for the government or any qui tam relator to recover damages under the FCA for any false claim or fraud by subcontractors on government or govern- ment-funded projects. For all practical purposes, Allison Engine narrowed the scope of the FCA to exempt sub- contractors, even those involved in blatant fraud, from its provisions. FERA makes multiple substantive changes to the statutory provisions that the U.S. Supreme Court relied upon in deciding Allison Engine, and that other fed- eral courts relied upon in other rulings interpreting the FCA restrictively. These include the following: • FERA Section 4(a)(1) clarifies the FCA’s present- ment requirement by deleting the former require- ment that a false claim be presented "to an officer or employee of the United States Government or a mem- ber of the Armed Forces of the United States." 41 Allison Engine Co. Inc. v. United States ex rel. Sand- ers, 553 U.S. 662, 128 S. Ct. 2123, 170 L. Ed. 2d 1030 (2008); on remand, 667 F. Supp. 2d 747 (2009).

11 • FERA Section 4(a)(2) defines the term "claim" to include not only a request or demand presented to a federal officer, employee, or agent, but also one pre- sented to a contractor, grantee, or other recipient, if the money or property requested is to be spent or used on the Government's behalf, and if the Govern- ment has provided any portion of the money or prop- erty, or will reimburse the contractor, grantee or re- cipient for any portion of it. • FERA Section 4(a)(1) and (2) clarifies the FCA’s "make or use" provision by deleting the former § 3729(a)(2) requirement that a false record or state- ment be made or used "to get a false or fraudulent claim paid or approved by the Government." It substi- tutes a new requirement that the false record or state- ment be "material" to a false or fraudulent claim, with FERA Section 4(a)(2) defining the term "material" to mean "having a natural tendency to influence, or to be capable of influencing, the payment or receipt of money or property." • FERA Section 4(a)(1) deletes the former § 3729(a)(3) requirement that the purpose of a con- spiracy be "to defraud the Government by getting a false or fraudulent claim allowed or paid," the lan- guage upon which the Supreme Court relied in impos- ing its intent requirement in Allison Engine. • FERA Section 4(a)(1) expands the FCA’s conspiracy provision to cover conspiracy to violate any of the Act's other liability provisions, now designated by the new § 3729(a )(1 )(C) as § 3729(a )(1 )(A), (BL (DL (EL (F), or (G). • FERA Section 4(a)(1) deletes the former § 3729(a)(4) requirement that the Government prove that failure to deliver all of Government money or property must be done by one "intending to defraud the Government or willfully to conceal the property." • FERA Section 4(a)(1) also deletes from § 3729(a)(4) the requirement that the amount of property that a person fails to deliver is less "than the amount for which the person receives a certificate or receipt." Allison Engine and Totten Reversed Beyond the substantive provisions discussed above, at least two other provisions of FERA indicate that Con- gress intended to override Allison Engine, Totten, and other recent court decisions interpreting the FCA re- strictively. FERA Section 4 was entitled "Clarifications to the False Claims Act to Reflect the Original Intent of the Law," expressing a congressional intent to overrule court decisions inconsistent with FERA's provisions. FERA's effective date provision was even more pointedly directed at overriding Allison Engine. FERA Section 4(f) makes the deletion from former § 3729(a)(2) of the requirement that a false record or statement be used "to get a false or fraudulent claim paid or approved by the government” and the substi- tution of the new § 3729(a)(1)(B) requirement that the false record or claim merely be "material to a false claim” effective retroactive to June 7, 2008, 2 days prior to the date of the June 9, 2008, decision in Alli- son Engine.42 Congress went beyond these provisions to express dis- approval of the Supreme Court's decision in Allison En- gine and other recent court decisions. The legislative history in both the Senate and the House included multiple express, direct, explicit, and clear and un- ambiguous statements of congressional intent to overrule those decisions. The Senate Judiciary Committee Report on the bill that became FERA stated, for example, that Congress was amending the FCA because its "effectiveness…has recently been undermined by court decisions which limit the scope of the law."43 Referring specifically to the Allison Engine and Totten cases, the Senate Judici- ary Committee Report stated that Congress was amending the Act "to clarify and correct erroneous interpretations of the law" in those cases.44 Pointing out that Allison Engine allowed subcontractors to escape liability unless the Government could present direct evidence that they had specifically intended to defraud the Government itself, the Senate Judiciary Committee Report stated that this result "is contrary to Congress's original intent in passing the law and creates a new element in a FCA claim and a new de- fense for any subcontractor that are inconsistent with the purpose and language of the statute." 45 Noting that Totten required direct presentment to the government, thus precluding recovery for false claims presented to a government grantee such as Amtrak, the Senate Judiciary Committee Report stated that this decision "runs contrary to the clear language and congressional intent of the FCA by exempting subcontractors who knowingly submit false claims to general contractors and are paid with Government funds."46 Indicating that Totten had prevented recovery for false claims in a series of subsequent cases "representative of the types of frauds the FCA was intended to reach when it was amended in 1986," the Senate Judiciary Committee Re- port stated that FERA amends the FCA to clarify that false claims liability attaches whenever a person knowingly makes a false claim to obtain money or property, any part of which is provided by the Gov- ernment without regard to whether the wrongdoer deals directly with the Federal Government; with an agent acting on the Government's behalf; or with a third party contractor, grantee, or other recipient of such money or property.47 42 This retroactive provision of FERA was, however, held unconstitutional as a violation of the Constitution's prohibi- tion against ex post facto punishments, on remand in the Allison case; see United States v. Allison Engine Co. Inc., 667 F. Supp. 2d 747 (2009). 43 S. REP. NO. 111-10, at 4 (2009); available online, see note 36 supra. 44 Id. at 10; available online, see note 37 supra. 45 Id., available online, see note 37 supra. 46 Id. at 10–11; available online, see note 37 supra. 47 Id. at 11; available online, see note 37 supra.

12 Congressman Berman, the Vice Chair of the House Judiciary Committee, similarly stated that "some courts have incorrectly grafted limitations to the reach of the Act, leaving billions of dollars vulnerable to fraud," even though "Congress intended the False Claims Act to protect all Government funds and prop- erty, without qualification or limitation." 48 Referring specifically to Allison Engine, Congressman Berman pointed out that it "severely limits the reach of the law" by absolving firms from liability for false claims against "Government funds disbursed for Government purpose by a Government contractor or other recipient of Government funds, even if such fraud damages the Government or its programs," unless the government can prove by direct evidence that the government it- self expressly approved or directly issued the payment in question.49 Congressman Berman commented that Allison Engine was particularly damaging and inap- propriate because "many inherently governmental functions are carried out by government contractors these days, including contracting and program man- agement functions."50 Congressman Berman went on to state directly that the "primary impetus for the cur- rent corrective legislation is to reverse these unaccept- able limitations and restore the False Claims Act to its original status as the protector of all Government funds or property."51 These direct and strong statements express a clear congressional intent that the FCA continue to serve as a strong and effective tool in the hands of the Federal Government, its grantees, and qui tam relators in order to defend Government programs and expenditures against false claims and fraud, including fraud by sub- contractors, and fraud affecting state contracts funded by federal-aid grant agreements, as well as fraud by prime contractors and fraud affecting federal agency contracts directly. Intervention by the Government FERA Section 4(b), "Intervention by the Govern- ment," amends 31 U.S.C. § 3731(b) by inserting a new § 3731(c), providing as follows: If the Government elects to intervene and proceed with an action brought under 3730(b), the Government may file its own complaint or amend the complaint of a person who has brought an action under section 3730(b) to clarify or add detail to the claims in which the Gov- ernment is intervening and to add any additional claims with respect to which the Government contends it is en- titled to relief. For statute of limitation purposes, any such Government pleading shall relate back to the filing date of the complaint of the person who originally brought the action, to the extent that the claim of the Government arises out of the conduct, transactions, or 48 CONG. REC. E1296 (daily ed. June 3, 2009) (statement of Rep. Berman); available online, see note 38 supra. 49 Id. at El296; available online, see note 38 supra. 50 Id. 51 Id. occurrences set forth, or attempted to be set forth, in the prior complaint of that person.52 The legislative history of FERA indicates that this provision, like other FERA provisions, was intended at least in part to overrule a federal court decision. In 2006, the U.S. Court of Appeals for the Second Circuit had indicated in United States v. Baylor Univ. Medi- cal Center that the Government might not be allowed to invoke FRCP Rule 15(c)(2), allowing amendment of a pleading to relate back to the original date of a plead- ing, if it sought to amend a relator's complaint after intervening in a qui tam case under the FCA.53 Con- gressman Berman's remarks on FERA stated expressly and clearly that FERA § 4(b) was intended to authorize the Government to invoke FRCP Rule 15(c)( 2) in that situation notwithstanding the ruling in that case.54 Civil Investigative Demands FERA Section 4(c), "Civil Investigative Demands," amends 31 U.S.C. § 3733 regarding the Government's authority to make civil investigative demands during investigations of potential false claims matters. This amends 31 U.S.C. § 3733(1) to add a new subparagraph (8) redefining "official use" of c iv i l invest igat ive demands (CID) materials authorized by law without court order, including DOJ investigative use in memo- randa; communications with experts, other federal, state or local agencies and their contractors, qui tam relators and their counsel, and the like; and DOJ liti- gation use in motions, memoranda, briefs, and com- munications with investigators, auditors, experts, con- sultants, counsel for the parties, arbitrators, and mediators.55 Aside from provisions on Government sharing of in- formation with qui tam relators as discussed below, FERA Section 4(c) also makes multiple technical amendments to various paragraphs and subparagraphs of 31 U.S.C. § 3733, the cumulative effect of which is to eliminate the former requirements for direct judi- cial supervision of U.S. DOJ use of CID information and for use to be controlled by the Attorney General personally, thus affording much greater efficiency and flexibility in DOJ use of CID information for in- vestigative and litigation purposes. These include technical changes to the wording in or preceding 31 52 FERA, Pub. L. No. 111-21, 123 Stat. 1617 (May 20, 2009), § 4(b). 53 United States v. Baylor Univ. Medical Ctr., 469 F.3d 263 (2d Cir. 2006). 54 CONG. REC. E1295–E1300, at E1299 (daily ed. June 3, 2009) (statement of Rep. Berman); available online, see note 38 supra. 55 FERA, Pub. L. No. 111-21, 123 Stat. 1617 (May 20, 2009), § 4(c)(3)(C).

13 U.S.C. §§ 3733(a)(1)(A),56 3733(a)(2)(G),57 3733(i)(2)(B),58 3733(i)(2)(C)59 and § 3733(1)(6), (7), and (8).60 Congressman Berman indicates in the legislative history that this was intended to make it easier and more effective for government investigators and at- torneys to use CIDs, the equivalent of administrative subpoenas, by authorizing not only the Attorney Gen- eral but his or her designees to issue CIDs, thus allow- ing delegation of their issuance rather than limiting issuance solely to the Attorney General personally; allowing the issuance of CIDs during an investigation even if the government has not yet intervened in a qui tam action; and clarifying the authority of gov- ernment investigators and attorneys to share infor- mation obtained through CIDs with fact and expert witnesses, qui tam plaintiffs, and other parties in con- nection with investigations and litigation.61 Federal Information Sharing with Relators FERA Section 4(c)(1) includes the addition of discretion- ary authority for the Attorney General to share informa- tion with any qui tam relator if the Attorney General de- termines it is necessary as part of any FCA investigation. It amends 31 U.S.C. § 3733(a)(1)(D) both to strike the phrase "may not delegate" and substitute the phrase "may dele- gate," and to add the following language: “Any information obtained by the Attorney General or a designee of the At- torney General under this section may be shared with a qui tam relator if the Attorney General or designee determines it is necessary as part of any false claims act investigation." Relief from Retaliatory Actions FERA Section 4(d) amends 31 U.S.C. § 3730(h), "Re- lief from Retaliatory Actions." Congressman Berman indicates in the legislative history that Congress in- tended the amendment of this section to clarify that this provision covers not only retaliation against whistleblowing employees who file qui tam actions, but also retaliation against whistleblowers who are contractors or agents rather than employees, against whistleblowers who bring wrongful activity to public attention without filing a qui tam action, against the family members and colleagues of whistleblow- ers, and against persons who refuse to participate in wrongdoing.62 56 Id. § 4(c)(l)(A)(i)(l) and II. 57 Id. § 4(c)(l)(B). 58 Id. § 4(c)(2)(A). 59 Id. § 4(c)(2)(B). 60 Id. § 4(c)(3)(A) and (B). 61 CONG. REC. at E1299 (daily ed. June 3, 2009) (state- ment of Rep. Berman); available online, see note 38 supra. 62 CONG. REC. El295–El300, at El300 (daily ed. June 3, 2009) (statement of Rep. Berman); available online, see note 38 supra. Effect of FERA Amendments to FCA on Existing State False Claim Statutes Multiple states have enacted state False Claims legislation based upon the former language of the Fed- eral FCA. State case law interpreting state false claims legislation often considers case law interpret- ing comparable provisions of t h e Federal FCA. Fol- lowing enactment of FERA, the provisions of previously enacted state False Claims statutes now diverge from the provisions of the Federal FCA as amended by FERA. This may pose potential difficulties for states in both administrative interpretation and judicial construction of state FCAs. States may find interpretation of their now outdated state FCAs still to be governed by Allison Engine, Totten, and other judicial interpretations of the pre-FERA version of the Federal FCA. They may not be able to take ad- vantage of the FERA improvements in the effective- ness of the Federal FCA unless and until they amend their state FCAs to track the FERA amendments to the Federal FCA. For these reasons, state legislative amendments to State FCAs would clearly appear to be warranted in light of the FERA amendments to the Federal FCA. Overview of Case Law and Legislation Since Enactment of FERA The U.S. Supreme Court has ruled on one FCA case since FERA was enacted. In Graham County Soil and Water Conservation District v. United States,63 revers- ing the Fourth Circuit, the Court held that the FCA's public disclosure bar was not limited to preclusion of suits based on information disclosed in federal gov- ernment reports, but also extended to preclusion of suits based on information disclosed in state govern- ment reports, which the Court held to fall within the statute's reference to "administrative" reports. During March 2010 however, the same month in which the Court decided the Graham County case, Congress passed federal health care reform legislation, Pub L. No. 111-148, which included provisions amending the public disclosure bar language of 31 U.S.C. § 3730(e)(4)(A) and (B). As amended, § 3730(e)(4(A) now uses the word "Federal," "Congressional," and "Government Accountability Office" to identify the types of hearings and reports that would give rise to public disclosure dismissals, indicating in the author's opinion that Congress intends to preclude state or local hearings or reports from giving rise to dismissals in future cases, essentially limiting the Graham County decisions to its facts. As amended, § 3730(e)(4)(A) also gives the U.S. Government a veto over court dismissals of qui tam actions on public disclosure grounds. An important post-FERA construction case indicates the potential continued impact of Allison Engine upon cases that were already pending when FERA was 63 Graham County Soil and Water Conservation Dist. v. United States, _ U.S._, 130 S. Ct. 1396, 176 L. Ed. 2d 225, 78 USLW 4214 (Mar. 30, 2010).

14 enacted, despite the FERA amendments to the FCA. In USDOT ex rel. Arnold v. CMC Engineering et al., the Third Circuit reviewed dismissal of a qui tam FCA action involving federal-aid highway projects.64 The appeal was argued before, but decided after, the en- actment of FERA. The case involved a qui tam action alleging false claims and fraud on federal-aid highway projects administered by the Pennsylvania Department of Transportation (PennDOT). The relator alleged that certain firms providing en- gineering, inspection, and consultant services to PennDOT on such projects had made false and fraudulent statements in seeking payment for their services. The defendants argued, among other things, that PennDOT was not a federal agency, but merely a federal grantee, and that false statements on PennDOT contracts were thus outside the scope of the FCA. The U.S. District Court for the Western District of Penn- sylvania granted the defendants' motion to dismiss, and the relator appealed. Reviewing this decision, the Third Circuit ruled that the U.S. Supreme Court's de- cision in Allison Engine warranted vacating the dis- missal and remanding the case to the District Court for further proceedings. 65 Examining closely the holding in Allison Engine, the Third Circuit contrasted the facts of Allison Engine with the facts in the CMC case. The Third Circuit pointed out that the facts in Allison Engine had in- volved an alleged fraud by a subcontractor against a private contractor, with fraudulent documents submit- ted to a contractor rather than directly to the Govern- ment, so that it was difficult to tell whether the Gov- ernment as opposed to the contractor had been injured. The language used in the U.S. Supreme Court ruling appeared to indicate that the decision might be fact-dependent, and might not establish a universal rule applicable to different facts.66 In the CMC case, the engineering firm had submitted allegedly false and fraudulent statements not to a contractor, but di- rectly to PennDOT. The Third Circuit remanded the CMC case to the District Court, suggesting it "recon- sider its view" that a claim could never be made to a state transportation agency. 67 That Allison Engine continues to impact the litiga- tion of FCA cases, despite the enactment of FERA, is also demonstrated by the lower court's ruling on re- mand in the ongoing Allison Engine case after FERA was enacted. That decision, by the U.S. District Court for the Southern District of Ohio, appears significant for future interpretation of the FCA as amended by FERA.68 As noted in this digest congressional enactment of FERA was motivated in part by a congressional intent 64 USDOT ex rel. Arnold v. CMC Eng’g et al., 564 F.3d 673 (3d Cir. 2009). 65 Id. at 675. 66 Id. at 678, 679. 67 Id. at 679. 68 United States ex rel. Sanders v. Allison Engine Co., Inc., 667 F. Supp. 2d 747 (S.D. Ohio 2009). to overturn the U.S. Supreme Court's decision in the Allison Engine case. Underlining the disapproval with which Congress viewed the Court's decision, Congress gave certainof FERA's provisions an effective date retro- active to 2 days before the date on which the Court handed down its decision.69 When the Allison Engine case was remanded to the U.S. District Court for the Southern District of Ohio for further proceedings, the parties and the court faced new issues arising under FERA. The case involved allegations that subcontractors had submitted false and fraudulent claims to a contractor concerning com- ponents of electrical systems for U.S. Navy destroyers. The U.S. Supreme Court's decision in the case had effectively exempted subcontractors from liability un- der the FCA. Congress, through FERA, had then amended the FCA to clarify the congressional intent that subcontractors be held liable under the Act. Con- fronted on remand by renewed exposure to liability, the subcontractors challenged the retroactive applica- bility of the FERA amendments to the Act. Granting the subcontractors' motion, the District Court held the retroactive applicability of the FERA amendments to the Act to be unconstitutional, on the grounds that they violated the constitutional prohibition against ex post facto penalties. The District Court reasoned that potential recoveries under the FCA went well beyond recovery of actual damages and included both treble damages and additional civil penalties, provisions held to be punitive rather than restorative in nature and thus subject to the Consti- tutional prohibition against ex post facto punish- ments.70 While leaving the FERA amendments to the Act valid on a prospective basis from the date of FERA's enactment in 2009, this ruling excludes the ret- roactive applicability of the FERA amendments to cases prior to the date of FERA's enactment, something which future false claims litigants will need to take into ac- count. Another post-FERA decision by the Fifth Circuit sheds light on the interpretation of the term "materi- ality" as used in determining whether conduct has suf- ficient impact upon government payment decisions to trigger liability under the FCA. In U.S. ex rel Longhi v. Lithium Power Tech., lnc.,71 a complex case involving multiple parties, the Fifth Circuit has ruled that "ma- teriality" under the FCA, as amended by FERA, requires proof only that the defendant's false statements could have influenced the Government's payment decision, or had the potential to do so. While not yet establishing clear precedent, one case in which the D.C. Circuit issued a post-FERA ruling bears watching for possible future rulings with the potential to have precedential value for false claims construction litigation. The narrow issue on appeal in In re D.R.C., Inc. was a petition for mandamus seeking 69 See § II of this digest at 10–17, supra. 70 667 F. Supp. 2d, at 754, 755. 71 575 F.3d 458, 469 (5th Cir. 2009).