United States: Are Procurement-Related False Claims Act Investigations Unreasonably Burdensome?

False Claims Act, 31 USCA §§ 3729-3733, investigations in the procurement context may be unreasonably broad. The Department of Justice has extensive powers to investigate FCA violations, including the use of Civil Investigative Demands (CID), 31 USCA § 3733. But this expansive authority is designed to be used sparingly. The Supreme Court has ruled that the FCA is not an "all-purpose antifraud statute" nor is it a "vehicle for punishing garden-variety breaches of contract or regulatory violations." Universal Health Servs., Inc. v. U.S. ex rel. Escobar, 136 S. Ct. 1989 (2016) (internal quotation marks omitted). In the procurement context, where annual FCA recoveries are comparatively modest, the question must be asked-do FCA investigations exceed a reasonable scope and instead trend toward impermissible investigations of garden-variety breaches of contract or regulatory violations? See Press Release, U.S. Dep't of Justice, Justice Department Recovers Over $2.2 Billion from False Claims Act Cases in Fiscal Year 2020 (Jan. 14, 2021), www.justice.gov/opa/pr/justice-departmentrecovers-over-22-billion-false-claims-act-cases-fiscalyear-2020; see also Civil Division, U.S. Dep't of Justice, FRAUD STATISTICS - OVERVIEW: October 1, 1986 - September 30, 2020, www.justice.gov/opa/ press-release/file/1354316/download (last visited Sept. 5, 2021) (collectively, "DOJ Press Release").

About the FCA-The FCA provides that any person (or company) who knowingly submits false claims to the Government shall be liable for treble damages plus per-claim penalties that are adjusted for inflation annually and currently range between $11,803 to $23,331. The FCA is a powerful antifraud statute, and "[m]any of the [Civil] Fraud Section's cases are suits filed under the [FCA], a federal statute originally enacted in 1863 in response to defense contract fraud during the American Civil War." The False Claims Act, U.S. Dep't of Justice, www.justice.gov/civil/false-claims-act (updated Jan. 14, 2021). FCA recoveries regularly bring billions of dollars back to the Treasury annually, but FCA recoveries tied to Department of Defense procurement totaled approximately three percent of that number. See DOJ Press Release.

About CIDs-CIDs may issue "[w]henever the Attorney General, or a designee ... has reason to believe that any person may be in possession, custody, or control of any documentary material or information relevant to a false claims law investigation." 31 USCA § 3733(a)(1). Before any legal proceedings begin, DOJ may draft and serve "a civil investigative demand requiring such person (A) to produce such documentary material for inspection and copying, (B) to answer in writing written interrogatories with respect to such documentary material or information, (C) to give oral testimony concerning such documentary material or information, or (D) to furnish any combination of such material, answers, or testimony." Id. And, to the extent the FCA investigation involves a qui tam relator, CID responses "may be shared with [the] qui tam relator." Id.

The sheer breadth of CID authority means that-before potential defendants have an opportunity to understand the allegations against them and therefore raise reasonable objections to the scope of the inquiry-DOJ can obligate companies to spend potentially millions of dollars in document collection, review and production costs. There is no meaningful opportunity for CID recipients to determine if the allegations are "garden-variety breaches of contract or regulatory violations." Escobar, 136 S. Ct. at 2003. Instead, CID recipients must comply, often at tremendous cost.

Has FCA Investigative Procedure Exceeded the FCA's Reach in the Procurement Context?- Several FCA trends suggest that the burden of responding to FCA investigations may weigh too heavily on Government contractors.

1. Defense Procurement-Related Recoveries Are Comparatively Low: Compared to healthcarerelated FCA recoveries, procurement recoveries (and especially DOD contracting recoveries) are comparatively low. In 2020, they totaled approximately three percent of FCA recoveries and in recent years have struggled to get out of the mid-single-digit percentages. See DOJ Press Release.
2. Increased Use of Dismissal Authority in FCA Cases: According to a recent article in The National Law Review, since the Granston Memo issued in 2018, "DOJ has dismissed at least 50 meritless qui tam actions pursuant to 31 U.S.C. § 3730(c)(2)(A). Prior to the Granston Memo, DOJ exercised its dismissal authority just 45 times in approximately 30 years." Kevin M. Coffey, Newly Proposed FCA Amendments Would Hinder Defendants, Nat'l L. Rev. (July 28, 2021), www.natlawreview. com/article/newly-proposed-fca-amendmentswould-hinder-defendants. Dismissals tend to come later, after investigation and with the costs of that investigation borne by the defendant.
3. Recent Legislative Attempts to Strengthen FCA Seemingly Acknowledge Overuse of the Statute, and the Burden of Discovery: In recent months, Sen. Charles Grassley (R-Iowa) led a group of lawmakers in a (so far) unsuccessful effort to amend the FCA in two key ways. First, the proposed legislation would have shifted the burden of proof to the FCA defendant to prove a lack of materiality by the extremely high "clear and convincing evidence" standard once the Government has shown materiality by a preponderance. Second, the proposed amendments would have shifted costs of FCA discovery to defendants. False Claims Amendments Act of 2021, S. 2428, 117th Cong. (2021), www.grassley. senate.gov/imo/media/doc/117s2428_-_false_ claims_amendments_act.pdf.pdf

There simply is no reason to make it harder for defendants to raise lack of materiality as a defense to FCA actions unless lawmakers believed too many FCA suits were failing because of how the Supreme Court defined materiality in Escobar. Additionally, the proposed discovery fee-shifting language in Sen. Grassley's proposed amendments requires additional consideration. The language applies to non-intervened qui tam cases, and provides that:

Id. A non-intervened qui tam case is one the Government has chosen not to put its resources behind. The Government retains an interest in recovering funds through settlement, but does not believe the case is worthy of Government time, energy, effort, and resources to bring. The proposed legislation would shift discovery fees to the defendant in non-meritorious qui tam matters.

But should not that same presumption also benefit the defendant/CID recipient? The relative ease with which CIDs issue, and their comparative breadth, imposes substantial costs on Government contractor defendants before the Government has decided to intervene. It is also surprising how many CID questions force the defendant to foot the bill for documents and information that DOJ could easily obtain from within the Government instead. Is this an appropriate cost that FCA defendants should be forced to pay merely for being the unlucky defendant in a qui tam suit? And what if the underlying suit is focused on a garden-variety breach, or regulatory violation, and therefore improper for redress under the FCA? Should defendants have to spend millions of dollars without the opportunity to know what the suit is about, and therefore not be able to seek relief?

The existing procedural protections in 31 USCA § 3733 to narrow the scope of CIDs are insufficient to afford contractors the ability to push back on overbroad CIDs. CID recipients have 20 days to file suit in U.S. district court and petition to modify or set aside the CID. See 31 USCA § 3733(j)(2) and (3). But there is typically insufficient information on the face of the CID to inform CID recipients about the nature of the investigation, nor about whether the allegations are more than mere garden-variety breaches of contract or regulatory violations.

Conclusion-Nothing here should be misconstrued as an argument that intentional fraud should go unpunished or somehow bad actors should have an easier time "getting away with it." Rather, these are important issues as we grapple with cost and productivity drains on our nation's procurement spend.

The trends highlighted here suggest DOJ is going beyond what is reasonable when issuing CIDs. DOJ could shed needed light on these issues by including in the Department's annual statistics the number of qui tam cases in which the Department intervenes, by category of case, as well as the number of cases in which the Department declines to intervene, by category. Similarly, DOJ might publish the number of CIDs issued in intervened cases versus non-intervened cases. In the absence of this data, however, one might reasonably conclude that CIDs and FCA investigations drain substantial time, energy and resources from Government contractors that could otherwise be devoted to improving products, investing in research and development, or lowering overall costs of procurement.

Originally published by The Government Contractor

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