Supreme Court's Allison Engine Decision Narrows the Scope of False Claims Act Cases That Can Be Brought Against Subcontractors

10 June 2008 Publication
Authors: Maria E. Gonzalez Knavel Pamela L. Johnston Lawrence M. Kraus Michael P. Matthews Robert D. Sevell David W. Simon Tami S. Smason Michael J. Tuteur Lawrence W. Vernaglia Judith A. Waltz

Legal News Alert: White Collar & Corporate Compliance

On June 9, 2008, the Supreme Court (Court) released a significant False Claims Act (FCA) whistleblower decision that may have far-reaching implications for government contractors, particularly subcontractors. As discussed below, this opinion heightens what the government and whistleblowers must prove in false claims cases when the allegedly false report or statement is attributable to a subcontractor instead of the prime government contractor. The case is likely to be the subject of further litigation in a wide variety of FCA cases, including those involving Medicare and Medicaid.

Justice Alito, writing for a united court in Allison Engine Co. v. United States ex rel. Sanders, No. 07-214, ___ U.S. ___ ( June 9, 2008), reversed the U.S. Court of Appeals for the Sixth Circuit’s decision and interpreted portions of the FCA in several new directions. The case arose from the construction of U.S. Navy destroyers and involved some allegedly faulty engine generators that subcontractors had manufactured or assembled for the prime contractors who operated the shipyards, allegedly with knowledge that their confirmations of compliance with Navy specifications were false. The Court took the case to resolve a circuit split over the question of whether a false claim must, in fact, be “presented” by the subcontractor directly to the government for the government to prove liability against the subcontractor, noting that the Sixth Circuit’s analysis in Allison Engine conflicted with the United States Court of Appeals for the District of Columbia’s Totten decision, United States ex rel. Totten v. Bombardier Corp., 380 F.3d 488 (D.C. Cir. 2004). The Sixth Circuit in Allison Engine had found that the government need not prove that a subcontractor directly “presented” the false report or statement to the government, finding instead that it was sufficient if the government proved that a subcontractor had intended to cause a false claim to be paid by a private entity using government funds. The respondents, who are former employees of the subcontractors and are serving as whistleblowers/relators on behalf of the United States in this case, contended that neither 31 U.S.C. § 3729(a)(2) nor (a)(3) require presentment of invoices to the government by the subcontractor or the prime contractor, but only that the false claim be paid out of federal funds, with a resulting loss to the federal treasury.

Without endorsing the presentment requirement advocated by Allison Engine and its fellow subcontractors, the Court held that a payment “by the Government” requires more than a mere payment using government funds because to read otherwise “would expand the FCA well beyond its intended role of combating” fraud against the government, id. at 5, and “threaten to transform the FCA into an all-purpose anti-fraud statute.” Id. at 9. The Court instead read a limiting principle into the requirement in a § 3729(a)(2) case that the defendant must make a false record or statement “to get” a false or fraudulent claim “paid by the Government.” The Court explained that because “to get” denotes purpose, the government and its relators must show that a defendant had the purpose to get the false record or statement paid or approved by the government. Id. at 5.

The Court emphasized the need for a causal link between the defendant's intent to submit a false report to the prime contractor and intending for the false statement or record to be used by the prime contractor to get the government to pay the prime contractor’s claim.

The decision places new limits on the FCA's potential application to subcontractors. The Court specifically distinguished the situation in which "a subcontractor submits a false statement to the prime contractor intending for the statement to be used by the prime contractor to get the Government to pay its claim," in which FCA liability would apply, from the situation in which "a subcontractor or another defendant makes a false statement to a private entity and does not intend the Government to rely on that false statement as a condition of payment," where there is no purpose of inducing payment "by the Government" and therefore no potential § 3729(a)(2) liability.

The Court also appeared to limit claims under § 3729(a)(2) to those where a defendant intended that the false record or statement be material to the government's decision to pay or approve the false claim. Id. at 2. How courts apply this materiality language in future cases bears watching because the Court utilized a tailored definition of “materiality” that focuses on false statements that are made “with the purpose of inducing payment” by the government of false claims. Id. at 8. Regardless, it is clear that FCA plaintiffs must now prove that the defendant had the purpose of defrauding the U.S. government and not just the purpose of getting paid by one who happens to be a recipient of federal funds.

Given the decision's late-in-the-term release date and the disagreement between some of the justices during oral argument, the unanimous result comes somewhat as a surprise. At oral argument, the justices seemed divided and troubled by aspects of each of the proffered interpretations. Justices Kennedy, Ginsburg, Stevens, Breyer, and Souter had all expressed skepticism at the petitioners' argument that evidence of direct presentment to the government was required, and Justice Ginsburg expressed particular concern that the petitioners' interpretation might cut out claims arising under Medicare and Medicaid that are currently regarded as being properly presented under the FCA. But Justice Ginsburg, along with Justices Roberts, Scalia, Breyer, and Souter, also expressed varying degrees of concern about the potential scope of adopting the respondents' and Sixth Circuit's interpretation of the statute. During argument, Justice Scalia noted that "[t]his statute doesn’t have to cover every ill in the world."

While the opinion itself is silent as to its application to Medicare and Medicaid cases, the Court's ultimate unanimity and approach would appear to signal that the justices shared a concern raised by Justice Ginsburg in oral argument — that the prosecution of false Medicare and Medicaid claims, otherwise understood to be covered by the FCA, not be affected by this decision. However, in at least some Medicare and Medicaid cases, there may be an opportunity for defendants to argue that this decision makes some FCA claims vulnerable to dismissal, particularly if the allegedly false report or other communication at issue can be shown not to have been made “with the purpose of inducing payment” by the government or the falsity in the statement was not material. Some litigants in Medicare and Medicaid FCA cases also might try to argue more broadly that it is the fiscal intermediaries, carriers, or other non-government actors who will rely on reports or statements at issue and who will make the decisions to deny or approve the submitted claims, not the government.

On the legislative front, government subcontractors may want to continue to monitor Sen. Grassley’s legislative actions in this arena to see whether the ground gained through this Allison Engine opinion is undercut through legislation.

Legal News Alert is part of our ongoing commitment to providing up-to-the minute information about pressing concerns or industry issues affecting our white collar and health care clients and colleagues.

Please contact the following attorneys for additional information on this alert or for questions regarding false claims counseling or litigation matters: 

False Claims Litigation

San Francisco, California
Thomas F. Carlucci

Chicago, Illinois
Daniel S. Reinberg

Frank E. Pasquesi

Milwaukee, Wisconsin
David W. Simon

Los Angeles, California
Pamela L. Johnston

Tami S. Smason

Tampa, Florida
Michael P. Matthews

Boston, Massachusetts
Michael J. Tuteur

Lawrence M. Kraus

Health Care Counseling

San Francisco, California
Judith A. Waltz

Milwaukee, Wisconsin
Maria E. Gonzalez Knavel

Washington, D.C.
Lena Robins

Chicago, Illinois
Janice A. Anderson

Los Angeles, California
Robert D. Sevell

Cheryl L. Wagonhurst

San Diego, California
R. Michael Scarano, Jr.

Boston, Massachusetts
Lawrence W. Vernaglia

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