Action Item: Government contractors must carefully reassess their exposure under the False Claims Act due to substantial increases in civil penalties.
Pursuant to the Bipartisan Budget Act of 2015 (the “Budget Act”), on May 2, 2016, the U.S. Railroad Retirement Board (the “Board”) issued an interim rule, which will take effect on August 1, 2016, nearly doubling current False Claims Act (“FCA”) civil penalties. While the Budget Act requires all federal agencies with jurisdiction over the FCA to issue rules adjusting the civil penalty amounts by July 1, 2016, we can expect similar increases by the Department of Justice (“DOJ”) and other applicable federal agencies. Though the rationale for increases—adjustments for inflation—may seem harmless on the surface, they will have a profound impact on the exposure to government contractors in FCA cases nationwide. A copy of the rule can be found here.
The Board’s new rule increases the minimum and maximum per claim FCA penalties from $5,500 to $10,781 and $11,000 to $21,563, respectively. The Board construed the Budget Act as warranting an inflationary adjustment of 198% over the current penalty range. Setting to one side the propriety of increasing punitive civil penalties in a fraud statute for inflation, we can expect DOJ and other federal agencies to follow suit with similar adjustments. In doing so, the prior penalty range, which already was significant, could now be crushing.
While FCA cases typically focus on the treble damages available under the statute, the civil penalties portion of the statute, which are mandatory if the contractor is found liable at trial, can easily eclipse potential or actual damages and must be imposed even if no damages have been proven. Indeed, in some cases, where damages may be nonexistent or difficult to prove, the government or qui tam relators may seek to pursue only penalties and forgo damages at trial. For example, in United States ex rel. Bunk v. Gosselin World Wide Moving, N.V., the Fourth Circuit affirmed $24 million in penalties even though the relators proved no damages and the government had paid only $3.3 million for the shipping services at issue.
As the FCA imposes liability on each false claim submitted, federal contractors in volume-based industries where claims can number in the thousands, such as shipping, healthcare, medical devices, IT, and routine commodities (such as office supplies), will bear the brunt of these changes, as the number of claims in these sectors can quickly surpass any damages that a plaintiff may be able to prove or which may even be at issue. In such cases, the civil penalties alone, even at the lowest range of the scale, can quickly outpace any damages by several orders of magnitude. The penalty increases will give the government and relators even more leverage than they already possess in FCA cases, may incentivize more suits, and may, due to the increased risks, encourage more settlements by contractors in cases that are really contract disputes rather than fraud. While this, and the forthcoming increases in civil penalties by other agencies, may finally violate the Eighth Amendment’s restrictions against excessive fines, such challenges have not historically been successful under the FCA. Accordingly, by dramatically increasing the monetary exposure to government contractors in false claims cases, the Board’s new rule under the Budget Act could be the latest catalyst that reshapes the FCA landscape.
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