July 28, 1995

Environmental Law - - Guarding Against False Claims Act Suits

New York Law Journal
Companies that hold federal contracts, or receive federal funds through state, local or private programs, should beware of a recent federal court decision that potentially expands contractor and grantee vulnerability to suit for violations of environmental laws.
The decision, United States ex rel. Fallon v. Accudyne Corp., 880 F. Supp. 636 (W.D. Wis. 1995), arises under the federal False Claims Act.1 That statute is especially attractive to potential plaintiffs seeking to act as private environmental enforcers because it allows winners to receive not only attorneys' fees and costs, but also a substantial percentage of the ultimate proceeds of the action or settlement of the claim. Fallon settled for $12 million, 22 percent of which ($2.64 million) will go to the citizen plaintiffs.
This column summarizes the ruling in Fallon, discusses the nature of False Claims Act suits, explains why many government contractors and grantees may be vulnerable2 and gives suggestion to contractors' counsel on how to reduce exposure to successful suits under the Fallon theory.
The `Fallon' Decision
In Fallon, several individuals and the Atlantic States Legal Foundation (relators/plaintiffs or relators) filed suit on behalf of the United States, alleging that Accudyne Corp. and another corporate defendant had knowingly made false claims for contract payments, in violation of 31 USC §3729(a)(1)-(3). The contracts held by Accudyne required that all work be performed in accordance with applicable federal, state and local environmental laws and regulations. According to the complaint, Accudyne falsely represented that its bid for the contracts included all costs associated with environmental compliance. Relators also contended that Accudyne falsely certified its compliance with those requirements to induce payment under the contracts.
Defendants moved to dismiss the complaint on two alternative grounds. First, they argued that relators were attempting to impose liability based solely on noncompliance with environmental statutes and thus failed to state a claim under the False Claims Act. Alternatively, they argued that, if relators stated a claim under the act, that claim was preempted by the environmental statutes. The court rejected both arguments.
The court held that defendants' first argument missed the point of the suit. According to the court, relators were not suing for violation of environmental statutes, but rather for defendants' false certifications to the United States that the companies were in compliance. The court held that allegations of false statements to induce payment by the government "unquestionably" stated a claim under the False Claim Act.
The court also rejected defendants' preemption argument. The court held that the False Claims Act provides a remedy for defrauding the government whereas environmental statutes are intended to address pollution. Because "there is no inconsistency in permitting remedies for fraud on the one hand and violation of federal environmental statutes on the other,"3 the court could not conclude that enactment of environmental legislation was intended to deprive relators of their False Claims Act suit. Accordingly, the court denied defendants' motion to dismiss.
In a later unpublished decision, the Fallon court addressed additional issues pertaining to liability.4 Significantly, the court refused to dismiss relators' claim that the environmental compliance provisions were a material part of the contracts, which Accudyne knowingly failed to perform in seeking payments.5 The court also ruled that an issue of fact precluding summary judgment in defendants' favor was presented as to the scope of the certification of compliance in Standard Form 1443.6 The case settled on the eve of trial in June for $12 million.
The False Claims Act
The Fallon suit appears to be a novel use of an old statute. The False Claims Act was originally enacted in 1863, in an effort to address corruption in the military procurement process during the Civil War.7 It was most recently amended in 1986, in the wake of public outrage at Pentagon contracts for "$500 hammers" and other extravagant expenditures on minor items.8
Two of the pivotal figures in the evolution of the False Claims Act were men whom one rarely finds occasion to mention in the same sentence. Abraham Lincoln and Edwin Meese. At President Lincoln's insistence, the statute included a "qui tam" provision, offering a generous reward to informers who assisted the government in prosecuting fraud.9 In 1943, Congress limited qui tam suits, by barring actions using information already possessed by the government, allowing the United States to take over the case, and reducing the bounty to relators.10
In the mid-1980s, then-Attorney General Edwin Meese III proposed amendments strengthening the act -- including certain provisions affecting qui tam suits -- in an effort to defuse opposition to the Reagan Administration's plan to increase defense spending. The False Claims Reform Act of 1986 relaxed the standards for liability, liberalized standing requirements in qui tam suits and increased damages and penalties (including the relator awards).
Under the 1986 amendments, there are three elements to a cause of action under the False Claims Act: (1) a claim for money or property of the United States (to be provided directly or through federal grants or reimbursement of funds to state, local or private entities dealing with the claimant); (2) that is false or fraudulent; and (3) that is knowingly presented. See 31 USC §3729. A claim will be deemed "false" if it rests on false records or statements. See id. §3719(a)(2).
Proof of "knowing" presentation does not require evidence of fraudulent intent or even actual knowledge that the claim is false.11 Deliberate ignorance or reckless disregard of the truth or falsity of a claim will satisfy the scienter requirement. See id. §3729(b). Moreover, under a theory of constructive knowledge, a contractor or grantee may be held liable for false claims known to its employees.12 Although the statute is not intended to punish honest mistakes or mere negligence, "those doing business with the Government have an obligation to make a limited inquiry to ensure that the claims they submit are accurate."13
The drafters of the False Claims Act, both initially and in 1986, made a conscious effort to encourage private enforcement actions under the statute. As an incentive to file the lawsuit, the act now awards successful relators not only attorneys' fees, expenses, and costs, but also a generous bounty, even if the United States chooses to intervene in the case. When the government does intervene, relators are entitled to 15 to 25 percent of the "proceeds of the action or settlement," which includes both statutory penalties and damages. Successful relators are guaranteed 25 to 30 percent of those proceeds when the government does not participate.
As the Fallon settlement makes abundantly clear, the proceeds may be substantial under the penalty and damage provisions of the 1986 amendments. The act now provides for civil penalties of $5,000 to $10,000 for each violation of the act (e.g., each false invoice). The penalties are mandatory (unless the defendant has already been sanctioned in a criminal prosecution for the same conduct),14 even if the government suffers no financial loss. In addition, if the government does suffer such a loss, treble damages may be recovered.15
According to counsel for the Fallon relators, the $12 million settlement reflected penalties only -- and only about half the amount for which the defendants could have been held liable. Although the settlement identifies only one $34 million contract, the suit evidently involved about 30 contracts held by the defendants. With $5,000 to $10,000 penalties for each violation over the life of each contract, the total potential recovery mounts rapidly.
Contractor Vulnerability
Given this statutory scheme, the Fallon decision appears to increase contractor susceptibility to suit. Under that case, potential False Claims Act relators merely need to ascertain whether a particular company has a government contract, review the contract to confirm that it includes provisions requiring environmental compliance, obtain contractor or grantee representations of compliance with contractually incorporated environmental requirements and identify any violations of those requirements during the contract term. Armed with that evidence and the decision in Fallon, a potential qui tam litigant would now appear able to state a claim under the False Claims Act.
Obtaining that evidence is not likely to be difficult. On-line data bases now store information about a wide range of government contracts. Government contracts in excess of $100,000 must include provisions requiring, among other things, contractor compliance with Clean Water Act and Clean Air Act mandates concerning "inspection, monitoring, entry, reports, and information." See 48 CFR §52.223-2. Contractors must also agree to use best efforts to comply with clean air and clean water standards. See id.
Potential litigants can thus identify contracts in excess of $100,000 and request copies of them through the Freedom of Information Act.16 The same means can be used to obtain copies of any express representations of compliance that may have been submitted in connection with claims for payment. Once that evidence is in hand, the potential relator merely needs to determine the accuracy of those representations with respect to environmental compliance.
That determination, too, can be made with relatively little effort. All records, reports and information (except proprietary information) submitted under the Clean Water Act and the Clean Air Act are available to potential False Claims Act relators via requests under the Freedom of Information Act or (for those permit programs that have been delegated to the states) the state public records laws.
The reports provide information that can be used to determine whether a particular company has violated the relevant environmental requirements during the contract period. Any noncompliance -- coupled with the evidence described above -- would evidently offer the basis for a False Claims Act suit under Fallon.
In view of the considerable incentive to litigate and relative ease of developing a False Claims Act case, government contractors would be well advised to take affirmative steps to reduce exposure to such suits.
For example, records of any permit or other environmental violations could be collected and forwarded for review to the corporate department responsible for preparing claims under government contracts. The contractor or grantee could determine whether any past certifications of compliance had been submitted to the government for a period when a violation occurred in the future, the data could be reviewed before submission of any claim, to ensure that no false information about environmental compliance is inadvertently included.
If a contractor or grantee discovers that it has mistakenly certified compliance in submitting a claim, it should consider notifying the relevant agency of the error. Where appropriate, the letter could indicate that the mistake was minor and inadvertent and that steps had been taken to correct the environmental violation. Upon being informed, the government could conceivably attempt to recover payments under the contract or pursue other punitive measures, but particularly if the environmental violation was minor and the contractor or grantee was otherwise in compliance with the contract terms, that risk would likely be small.
By informing the government of the false claim, the contractor or grantee could probably ward off False Claims Act qui tam suits. The act specifically denies courts jurisdiction over qui tam cases based on publicly disclosed allegations or transactions, unless the relator is an original source of the information. See id. §3730(e)(4).
That provision was designed to bar suits based on facts already known to the government, unless the relator provided the information.17 If a contractor disclosed a false claim, the contractor could argue that the relator of any qui tam action making the same allegations was not an original source. In the event that the government chose to act upon the contractor's disclosure, qui tam lawsuits would be jurisdictionally barred because of the prior legal or administrative proceeding. See 31 USC §3730(e)(3).
In addition to the jurisdictional arguments described above, contractors facing False Claims Act suits for environmental non-compliance should consider the applicability of other standard defenses. Suits are time-barred six years after the violation was committed or three years after the United States learned or should have learned of the material facts, whichever is later, but in any case, 10 years after the violation was committed. Contractors may also argue that submission of the false claim was merely negligent, not knowing, provided that they can show that they made the requisite "limited inquiry" into the accuracy of the claim.
Where the environmental infraction constituted only a minor and correctable violation of the contract, the contractor may also assert substantial compliance as a defense in a False Claims Act case or may argue that the false statement was not material and thus caused no injury.
Finally, where a suit is based entirely on information available in data bases or governmental files accessible to the public, a contractor might argue that there has been "public disclosure" of the false claim. The Fallon court rejected such an argument, but there is no reported opinion of that decision. The argument would clearly stand a greater chance of success, of course, if the evidence of environmental compliance was actually in the hands of the United States and not merely on record at a state agency.
As an environmental enforcement strategy, False Claims Act litigation is not ideal. Success does not afford injunctive relief to compel compliance with environmental laws. Counsel for the Fallon relators hope that, if the suits continue to be successful, the United States will ultimately tale environmental certifications more seriously. For now, however, the lawsuits present primarily a financial risk to individual government contractors and grantees.

(1) 31 USC §§3729-33 (1988 & Supp. V 1993).
(2) The analysis below applies equally to contractors and grantees, although, for the sake of simplicity, the authors refer to contractors only.
(3) Fallon, 880 F. Supp. at 640.
(4) The unpublished Memorandum and Order, United States ex rel. Fallon, et al. v. Accudyne Corp. et ano, No. 93-C-801-S, slip op. (W.D. Wis. June 19, 1995), is on file with the authors of this column.
(5) See id., slip op. at 33.
(6) See id., slip op. at 34. The certification provided in relevant part:
"I certify that the above statement has been prepared from the books and records of the above named contractor in accordance with the contract and instructions herein, and to the best of my knowledge and belief, that it is correct, that all the costs of contract performance (except herewith reported in writing) have been paid currently by the contractor, when due, in the ordinary course of business, that the work reflected above has been performed, that the quantities and amounts involved are consistent with requirements of the contract...." Id.
(7) See Paul W. Morenberg, "Environmental Fraud by Government Contractors: A New Application of the False Claims Act," 22 Boston College Envtl. Aff. L. Rev. 623, 625 (1995); Melvin C. Garbow, "Liability Under the Federal False Claims Act of Fraudulent Party in FHA Loan Transaction." 28 Geo. Wash. L. Rev. 642 (1959).
(8) See Morenberg, supra n.7, at 623 & n.1.
(9) See id. at 625. The original statute provided for double damages, half of which would fully compensate the government for its loss, and the other half of which was guaranteed to the informer (in addition to reasonable expenses and costs). See id. at 626 & nn. 20-22.
(10) See id. at 626-27; John T. Boese, Civil False Claims and Qui Tam Actions 1-13 (Supp. 1994).
(11) See Morenberg, supra n.7, at 631 & n.72
(12) See id. at 634 & nn. 94-96.
(13) S. Rep. No. 345, 99th Cong. 2d sess. 7 (1986), reprinted in 1986 USCCAN 5266, 5272.
(14) See United States v. Halper, 490 U.S. 435 (1989).
(15) The damages may be reduced to twice the financial loss if the contractor cooperates fully with the governmental investigation.
(16) Those contracts, and others for less than $100,000, may also include boilerplate provisions requiring compliance with environmental requirements, such as that in issue in Fallon.
(17) See Wang v. FMC Corp., 975 F.2d 1412 (9th Cir. 1992) (discussing legislative history and purpose of the provision); United States ex rel. Dick v. Long Island Lighting Co., 912 F.2d 13 (2d Cir. 1990).

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