Overzealous Claim Prosecution Can Be An Invitation To Liability: A Primer On Avoiding False Claims Acts
By William C Last, Jr.
Change orders, claims for extras, and delay claims are a common occurrence on government projects. Every contractor wants be paid the fair value of its work. There are legal limits, however, on what can be claimed.
With increasing frequency, governmental entities are responding to claims by asserting that the contractor's claim is false. If such a governmental claim defense assertion is successful, a contractor may be subject to civil and criminal sanctions, as well as debarment from future government contracts. This article examines the current state of federal and state false claims statutes. While this article only examines False Claims Acts that apply to public works projects, it should be noted that a contractor who submits a fraudulent claim for a private works project may be subject to a cause of action for fraud, with resulting punitive damages.
False claims statutes have been enacted by the federal, state and local governments. The first false claim statute that was enacted is the United States False Claims Act ( 31 U.S.C. sec. 3729 et seq.). Generally, the California False Claims Act (California Government Code sec. 12650 et seq.) corresponds to the Federal statute. More recently, a number of larger local public entities have enacted false claims ordinances. An example of the latter is the San Francisco False Claims Act.
Generally, a prosecution for a false claim can be prosecuted by a state or federal Attorney General, a local prosecuting attorney, or a qui tam plaintiff. A qui tam plaintiff is an individual who, pursuant to the requirements of the False Claims statutes, prosecutes a false claims case on behalf of the public entity, and receives a percentage of the recovery as compensation.
Since the federal and state False Claims Acts contain parallel provisions, this article will focus on the California False Claims Act.
What Constitutes A Claim?
Under the California Act, a "'Claim' includes any request or demand for money, property, or services made to any employee, officer, or agent of the state or of any political subdivision, or to any contractor, grantee, or other recipient, whether under contract or not, if any portion of the money, property, or services requested or demanded issued from, or was provided by, the state (hereinafter "state funds") or by any political subdivision thereof (hereinafter "political subdivision funds")." It should be noted that the submission of the false claim need not be made with a specific intent to defraud the public entity. However, the false claim must be knowingly made by the claimant. Knowingly made means that "a person, with respect to information, does any of the following: (1) Has actual knowledge of the information; (2) Acts in deliberate ignorance of the truth or falsity of the information; (3) Acts in reckless disregard of the truth or falsity of the information."
What Acts Are Prohibited?
The acts which are prohibited under the State and Federal False Claims Acts are:
(1) Knowingly presenting or causing to be presented to the state or any political subdivision, a false claim for payment or approval.
(2) Knowingly making, using, or causing to be made or used a false record or statement to get a false claim paid or approved by the state or by any political subdivision.
(3) Conspiring to defraud the state or any political subdivision by getting a false claim allowed or paid by the state or by any political subdivision.
(4) Having possession, custody, or control of public property or money used or to be used by the state or by any political subdivision and knowingly delivering or causing to be delivered less property than the amount for which the person receives a certificate or receipt.
(5) A person who is authorized to make or deliver a document certifying receipt of property used or to be used by the state or by any political subdivision, knowingly makes or delivers a receipt that falsely represents the property used or to be used.
(6) Knowingly buying, or receiving as a pledge of an obligation or debt, public property from any person who lawfully may not sell or pledge the property.
(7) Knowingly making, using, or causing to be made or used a false record or statement to conceal, avoid, or decrease an obligation to pay or transmit money or property to the state or to any political subdivision.
(8) When a person who is a beneficiary of an inadvertent submission of a false claim to the state or a political subdivision subsequently discovers the falsity of the claim, and fails to disclose the false claim to the state or the political subdivision within a reasonable time after discovery of the false claim. (Note: this category is not included in the federal False Claims Act).
It should be noted that the eighth category can place a general contractor who submits a subcontractor's false claim in jeopardy for violating the false claims statutes.
What Are The Penalties For Violating the Statute?
A violation of the California False Claims Act can result in a judgment against the offender for the costs of a civil action brought to recover the penalties or damages, and the offender may be liable to the state or political subdivision for a civil penalty of up to $10,000.00 for each false claim. Notably, the $10,000.00 penalty can be assessed for each item in a claim. For example, a pay request that includes numerous false costs can result in a penalty for each false cost.
In addition, the court may assess no less than two times, but no more than three times, the amount of damages which the state or the political subdivision sustains. However, that penalty maybe abated if the court finds all of the following: (1) The person informs the public entity within 30 days of learning of the false claim; (2) The person fully cooperates with any investigation; and (3) At the time the person furnished the state or the political subdivision with information about the violation, no criminal prosecution, civil action, or administrative action had commenced with respect to the violation, and the person did not have actual knowledge of the existence of an investigation into the violation.
The False Claim Act does not apply to any controversy which is less than $500.00, nor does the Act apply to a fraudulent tort claim.
A False Claims Act Violation Can Lead To Debarment
In addition to the possible assessment of civil and criminal penalties, a claimant who makes a false claim may subject itself to debarment from further work for the public entity. In a case entitled Stacy & Witbeck, Inc. v. City and County of San Francisco, a public works contractor brought a Government Code claim seeking to recover losses caused by delay in work on the contract. The San Francisco Public Utilities Commission brought an administrative action in which it determined that the contractor had asserted a false claim, deemed the contractor irresponsible, and barred the contractor from bidding on city public works contracts for a period of five years. The appellate court upheld the right of the Commission to debar the contractor. It should be noted that the decision to debar the contractor was made during an administrative hearing before the San Francisco PUC, rather than a judicial proceeding.
In recent years, many public entities have responded to claims and lawsuits by contractors by asserting that the contractor's claim is fraudulent. It is thus imperative that each contractor who submits a claim ensure that it is accurate, reasonable, and not overstated.
Since a prime contractor can be liable for a subcontractor's false claim, a prime subcontractor should use reasonable diligence in reviewing a subcontractor's claim before submission of the claim to the public entity. If the subcontractor's claim is questionable, the prime contractor should ask for and review the subcontractor's supporting documentation to reassure itself that the claim is accurate. If the claim cannot be supported with appropriate documentation, the prime contractor should so notify the subcontractor. If the subcontractor insists that claim be submitted, the prime contractor should inform the subcontractor that the claim will be submitted to the public agency with a notation that the contractor questions the validity of the claim.
The contractor should also be prepared to support the claim with appropriate documentation. Ideally, the documentation should accompany the claim. If the claim includes estimates, opinions, or approximations, those aspects of the claims should be so noted.
In sum, contractors should not hesitate to present valid claims. However, caution should be used so as to avoid claims that are overstated, or which contain items that are not factually and legally supportable.
This article, ©2000, was written by William C. Last, Jr. Mr. Last is an attorney who has been specializing in Construction Law for 20 years. Mr. Last also holds a California A & B contractors license. He can be contacted at 650-425-7679. This bulletin is published periodically to provide general information about current legal issues. If you have a specific legal question or need legal advice, you should contact an attorney.