False claims liability remains an ever-looming financial threat for U.S. defense contractors. For 2023, the Justice Department (DOJ) has announced over $862 million in government contracting and procurement False Claims Act (FCA) resolutions.
Perhaps the most significant threat of FCA liability lies in the whistleblower program. Due to limited government resources, the FCA grants anyone with original source knowledge of potential FCA violations the authority to report evidence of concerns and obtain compensation for any employer retaliation due to such reporting.
To further urge such reports, these qui tam “whistleblowers” receive substantial payment—in the tens of thousands to tens of millions of dollars. In July 2023, DOJ announced it had awarded former U.S. Marine Officer and Booz Allen Hamilton Holding Corporation employee Sarah Feinberg a $69.8 million whistleblower award for helping the government secure one of the largest financial settlements for a defense company in FCA history.
In July 2023, Booz agreed to pay a $377 million settlement to resolve allegations that the defense contractor overcharged the government by submitting improper commercial and international costs to government contracts.
Booz does not admit liability in the settlement. Unfortunately, by failing to address internal complaints as they came across the table, Booz paid a large settlement amount to avoid potentially lengthy, costly, and public litigation.
Avoiding FCA Violations
Each claim a defense contractor submits for government products or services containing material misrepresentation may be deemed a “false claim” in violation of the FCA. Each false claim is subject to a fine of between $11,803 and $23,607. Department of Defense (DoD) FCA defense contractor cases represent a wide variety of false claims conduct.
DoD false claims may involve a contractor shifting costs associated with a fixed-price contract to a cost-plus one, usually by falsifying accounting or timekeeping records. Similar to cross-charging, wrongful cost allocation is another type of FCA violation that occurs when a contractor shifts costs to the U.S. government that should be paid through private or foreign contracts. In this way, the contractor can quote lower prices to obtain private contracts while receiving the same amount by charging the DoD at a higher rate.
Under the Berry Amendment (Buy American Act), the DoD is prohibited from purchasing materials made outside of the U.S. except in narrow circumstances relating to availability. If a contractor secretly uses foreign materials to produce a product to fulfill a government contract, they may violate the FCA.
When the DoD has a single source supplier, the Truth in Negotiations Act (TINA) requires that contractors disclose accurate information about production costs so the government can pay them accordingly. When the supplier falsely inflates these prices, knowing that the government can’t compare costs with another manufacturer, TINA and FCA violations can result.
Another example is improper material substitution. The DOD has strict quality and testing requirements for the products it purchases and will not accept used, damaged, or refurbished goods. If a contractor falsely certifies that products meet government standards, the claims violate the FCA.
Similarly, it is up to contractors to certify that they have met contract specifications. Knowingly submitting products that will not perform as promised or do not meet the agreed-upon specifications violates the FCA.
Failing to accurately document costs, altering accounting information, withholding financial records, or misrepresenting expenses when bidding for a contract or submitting expense reports are other forms of FCA violations, along with charging for services never provided or materials of a higher quality and price than used. In some cases, contractors may also overcharge for labor or other expenses.
In addition, when a contractor violates the FCA, whether intentionally or not, it has a duty to report the violation to the government. Failure to report noncompliance is a violation in and of itself.
FCA Whistleblower Rights
Some level of internal reporting was involved in the majority of 2023 DOJ government contracting and procurement FCA resolutions–reports that could have resolved the issue in private without government intervention had they been acted upon.
In general, employees who report concerns internally—even when policy requires internal reporting—ultimately seek to protect the company, ensure the safety of American military personnel, and strengthen national security. When an internal report is ignored or delayed, the reporter will likely pursue government help to stop the alleged misconduct.
For fiscal year 2023, the National Defense Authorization Act (NDAA) authorized $858 billion in U.S. defense spending, which the DoD monitors carefully via the Federal False Claims Act. Initially created during the Civil War as a way for President Lincoln to curtail government fraud in the military, the False Claims Act made it illegal for contractors to submit false claims to a government agency.
Under the False Claims Act, employees, subcontractors, and third parties who are aware of defense contract fraud can report the activity, file a lawsuit on behalf of the government, and receive a financial reward.
Typically, once a whistleblower reports original source, non-public evidence of FCA violations, the DOJ will initiate an investigation and decide whether or not it will intervene in the case, filing a qui tam lawsuit under seal. Whistleblowers do not have to inform their employers that they plan to file an FCA claim and often remain anonymous until the DoD concludes the investigation.
Should the DOJ choose to prosecute, the whistleblower is entitled to between 15% and 25% of the money recovered in the lawsuit through a verdict or settlement. If the DOJ chooses not to take up the case, the whistleblower can pursue their lawsuit privately. In this scenario, the whistleblower stands to make even more: between 25 and 30% of the total recovery.
It is illegal for an employer to fire, demote, discriminate against, or harass an individual for reporting FCA violations. Such retaliatory acts may entitle the relator to remedies, including back pay, job reinstatement, and other damages.
A defense contractor’s risk for FCA liability increases with poor oversight and neglect to investigate or address internal concerns. With the ever-growing whistleblower award amounts and FCA enforcement, more and more defense contractor employees and others in the industry are becoming comfortable with pursuing FCA claims and holding companies accountable.
To avoid potential FCA violations, government contractors must remain aware of products, materials, contracts, and billing practices. Simultaneously, companies should recognize the importance of internal employee reports to help lessen the risk of FCA litigation and the resulting negative impact on company performance.
Eric Gang is the managing attorney and founder of Gang & Associates (www.veteransdisabilityinfo.com), where he leads the defense contractor and service-disabled veteran-owned small business program (SDVOSB) whistleblower programs. He can be reached at [email protected].