False Claims Act and Subcontractor Liability

On the issue of False Claims Act liability, there are varying opinions about the liability of the main contractor for a subcontractor. The bottom line is that both prime contractors and independent contractors can be liable under the Federal False Claims Act.  The DOJ and various agency IG offices have increased the level of investigations and are targeting both prime and subcontractors under the ACT.

The False Claims Act (FCA) is a federal law that imposes liability on individuals and companies for knowingly submitting false or fraudulent claims for payment to the government. It plays a crucial role in combating fraud, waste, and abuse in government contracts and programs. One important aspect of FCA liability involves subcontractors and their relationship with prime contractors.

Prime Contractor Responsibility for Subcontractors:

Prime contractors have a significant responsibility when it comes to subcontractors and their compliance with the False Claims Act. While subcontractors are legally independent entities, the actions of subcontractors can still impact the prime contractor’s liability under the FCA. Prime contractors are expected to exercise reasonable oversight and control over subcontractors to ensure compliance with legal and contractual obligations. This responsibility includes:

1. Due Diligence in Selecting Subcontractors:
Prime contractors should conduct thorough due diligence when selecting subcontractors. This includes evaluating their reputation, past performance, financial stability, and compliance history. Choosing reputable and trustworthy subcontractors can mitigate the risk of potential FCA violations.

2. Clear Contractual Requirements:
Prime contractors must clearly outline FCA compliance expectations in subcontract agreements. They should include provisions requiring subcontractors to adhere to all applicable laws and regulations, including the False Claims Act. Clearly defined contractual requirements set the standard for subcontractor behavior and establish the prime contractor’s commitment to integrity and compliance.

3. Monitoring and Oversight:
Prime contractors have a duty to monitor subcontractor activities to ensure compliance with the False Claims Act. This can involve periodic audits, site visits, documentation reviews, and other oversight mechanisms. Effective monitoring helps identify and address potential compliance issues proactively.

4. Training and Education:
Prime contractors should provide subcontractors with training and education on the False Claims Act, its implications, and the importance of compliance. This helps ensure subcontractors understand their obligations and the potential consequences of non-compliance.

Subcontractor Liability under the False Claims Act:
While subcontractors are separate legal entities, they can still be held liable under the False Claims Act for their actions. Subcontractors can face individual liability if they knowingly submit false or fraudulent claims for payment or engage in other fraudulent activities. Some important considerations regarding subcontractor liability include:

1. Independent Liability:
Subcontractors are independently responsible for their compliance with the False Claims Act. If a subcontractor knowingly submits a false claim, they can be held directly liable for FCA violations, facing legal consequences such as fines, penalties, and potential exclusion from future government contracts.

2. Joint and Several Liability:
In certain cases, both the prime contractor and the subcontractor can be held jointly and severally liable for False Claims Act violations. This means that if a subcontractor is found liable, the prime contractor may also be held responsible for the subcontractor’s actions, even if they were not directly involved or aware of the misconduct.

3. Whistleblower Actions:
Under the FCA’s qui tam provision, whistleblowers, also known as relators, can bring lawsuits on behalf of the government to expose fraud. If a subcontractor is engaged in fraudulent activities, a whistleblower lawsuit can be filed against them. This can result in significant legal and financial ramifications for the subcontractor and may also implicate the prime contractor.

4. Defenses and Mitigating Factors:
Subcontractors, like any defendant, have the opportunity to present defenses and mitigating factors in FCA cases. They can argue lack of intent, mistake, or other justifications to refute allegations of fraudulent behavior. However, establishing a credible defense requires a thorough understanding of FCA laws and legal expertise.

Qui Tam False Claims Act – Prime General Contractors False Claims Liability and Subcontractor Liability 

False Claims Act liability targets both prime General Contractors and liability for subcontractors who do business with the government. The Statute creates contractual liability against any person:

• who knowingly submits, or
• causes to be submitted, a false or fraudulent claim with
• intent to procure payment or approval from the government.

Anyone Submitting a False Claim is Liable

“Any person”: Emphasis on ANY.  This can be any person, organization, corporation, LLC, subcontractor or prime contractor. If you can contract to do business with the federal government, you can be any person subject to false claims liability under the Act. 

“Knowingly”:  Government contractors under the Federal False Claims Act are deemed to knowingly submit a false claim when they submit a claim they actually know is false, or they deliberately or recklessly disregard the truth or falsity of the claim.

• Failure to conduct due diligence can create contractual liability;
• Actual knowledge of the false claim is not required.

 “Causes to be submitted”: This language is invoked when a false claim is submitted to General Contractors to deliver to the government or given directly to the government. This is when independent contractor False Claims Act liability becomes most obvious.

• Liability of the main contractor for subcontractor under the Act is very fact specific
• Defending a False Claims Act case means understanding the details.

What is Subcontractor Liability under the Federal False Claims Act?

Subcontractor liability under the Federal False Claims Act (FCA) refers to the potential legal responsibility that subcontractors may face for submitting false or fraudulent claims for payment or reimbursement to the federal government. The FCA imposes liability on individuals and entities, including subcontractors, who knowingly present false or fraudulent claims, make false statements, or engage in fraudulent conduct related to federal government contracts or programs.

Subcontractors can be held liable under the FCA if they are found to have knowingly participated in or assisted with the submission of false claims, even if they were not the direct contractor with the government. This means that subcontractors can be held accountable for their own fraudulent actions or for knowingly aiding and abetting the prime contractor’s false claims.

The FCA provides for both civil and criminal liability. Civil liability can result in significant financial penalties, treble damages (triple the amount of actual damages suffered by the government), and exclusion from future government contracts. Criminal liability can lead to fines, imprisonment, or both, depending on the severity of the offense.

To establish subcontractor liability under the FCA, certain elements must be proven, including:

1. Submission of a False Claim: The subcontractor must have presented or caused to be presented a claim for payment or reimbursement to the federal government.

2. Knowledge: The subcontractor must have knowingly submitted or caused the submission of a false claim. Knowledge can be proven through evidence that the subcontractor had actual knowledge of the falsity or acted in deliberate ignorance or reckless disregard of the truth.

3. Materiality: The false claim must be material, meaning it has a natural tendency to influence or be capable of influencing the government’s decision to pay or approve the claim.

4. Presentment: The false claim must have been presented to an officer, employee, or agent of the federal government, such as a contracting officer or program administrator.

It is important for subcontractors to be aware of their obligations and responsibilities under the FCA and take steps to ensure compliance with applicable laws and regulations. This includes maintaining accurate and truthful records, conducting internal compliance audits, and promptly reporting any potential violations or concerns to appropriate authorities.

It is advisable for subcontractors to seek legal counsel from a government subcontractor attorney to understand their specific rights, obligations, and potential liabilities under the FCA, as the application of the law can vary depending on the circumstances of each case.

Is Your Government Contracts Subcontractor Agreement Viable?

Many general contractors that have federal government contracts tend to think that since the subcontractor has obvious liability the government investigators and law enforcement should not pursue the general contractor. Nothing can be far from the truth in the legal world.

• The first line of thinking is what does your subcontractor agreement state?
• The federal government can hold the general contractor liable for any Qui Tam false claim of the subcontract. The question becomes what rights do you have against the subcontractor?

Privity is Not Required Under the False Claims Act Liability for Subcontractors: The subcontractor in this scenario is solely responsible for this submission even if there is not in privity of contract with the government.

“False or Fraudulent Claim”: A claim is false or fraudulent when it is inaccurate, or if it bills for work not performed or products not used.

•  Some contracts require that the products or services comply with state and federal regulations before payment or approval.
•  If so, a subcontractor submitting a claim for payment of work or products that do not comply with the regulations is also a violation of the FCA.

 “Intent to procure payment or approval”: This element is satisfied if subcontractors submit, or cause a false claim to be submitted, intends for that claim to be used for, or supplied to, the government for payment or approval.

Qui Tam False Claims Act Liability of Main Contractor for Subcontractor

As General Contractors,  subcontractor False Claims Act penalties and responsibility can also be imputed to you as the prime. This is especially true when you have knowledge of the sub’s false claim or conspire with the sub to submit a false claim.

Most general contractors become subject to strict investigations because they do not put measures in place to make sure that the subcontractor is in compliance with the subcontractor agreement. By the time an investigation is launched, the damage may have already been done. The only thing left would be the contractor negotiate more favorable terms with the government.

• An independent contractor will be liable for the prime’s false claims submission if it conspired with the prime to make a false claim. 
• Courts generally look to the specific act and assess penalties only against the persons whom actually created the false claim.

False Claims Act Penalties 

Prime General Contractors and subcontractor False Claims Act penalties for a conviction under this Act are not trivial.

• “Any person, who is convicted under the civil False Claims Act, is liable to the United States Government for a civil penalty of not less than $5,000, and
• not more than $10,000, plus
• 3 times the amount of damages which the Government sustains because of the act of that person.”

Drafting accurate bids for government contracts, and implementing procedural safeguards to address prime and subcontractor False Claims Act liability can mean the difference between liability and dismissal of your case. 

For immediate help in a pending Qui Tam false claim of subcontract government investigation involving with False Claims Act and subcontractor liability, contact the government false claims act attorneys at Watson & Associates. Call 1-866-601-5518.