FALSE CLAIMS ACT

Allison Engine Co. v. United States

In June 2008, the U.S. Supreme Court resolved a question of whether the False Claims Act applies to any fraudulent claim paid for with government funds rather than only those fraudulent claims directly submitted to a government official. The Court determined that the act can be used if the false claim is intended to be paid by the government. In so ruling, the Court sent the case back to the Sixth Circuit Court of Appeals to apply the appropriate standard. The False Claims Act was originally enacted during the CIVIL WAR to prevent fraud perpetrated by defense contractors. The modern version of the statute has both a civil and a criminal portion. The civil portion provides as follows:

Any person who: (1) knowingly presents, or causes to be presented, to an officer or employee of the United States Government or a member of the Armed Forces of the United States a false or fraudulent claim for payment or approval; (2) knowingly makes, uses, or causes to be made or used, a false record or statement to get a false or fraudulent claim paid or approved by the government; [or] (3) conspires to defraud the Government by getting a false or fraudulent claim allowed or paid in full[,] … 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.

31 § U.S.C. 3729(a). Section (c) of the Act defines “claim” as “any request or demand, whether under a contract or otherwise, for money or property which is made to a contractor, grantee , or other recipient if the United States Government provides any portion of the money or property which is requested or demanded, or of the Government will reimburse such contractor, grantee, or other recipient for any portion of the money or property which is requested or demanded.”

The U.S. Navy in 1985 entered into contracts with two shipbuilders to construct a fleet of missile destroyers. The shipbuilders included Bath Iron Works and Ingalls Shipbuilding. The companies needed to construct a total of 90 generator sets to supply the electrical power to the ships. The shipbuilders contracted with Allison Engine (formerly a division of General Motors) to build these generators. Allison Engine, in turn, subcontracted with General Tool Company to assemble the generator sets, and General Tool Company (GTC) subcontracted with Southern Ohio Fabricators, Inc. (SOFCO) to manufacture parts of these sets.

The shipbuilders were paid a total of $1 billion for each destroyer, while Allison Engine was paid $3 million per generator set. GTC and SOFCO were paid $800,000 and $100,000, respectively, for each generator set. The generator sets were constructed according to specifications established by the Navy, and all of the funds used the pay the contractors and subcontractors were eventually paid for by the Federal Treasury.

Two former employees of GTC who had worked on the generator set assembly teams brought actions under the False Claims Act, alleging that the subcontractors had committed fraud in the construction of the generator sets. According to these employees, the subcontractors knew about several defects in the construction of the generator sets in violation of the Navy contracts, yet these companies submitted their invoice anyway. The employees argued that the invoices were “false or fraudulent claims” paid for with government funds and that this action violated the False Claims Act. The employees brought the suit as a qui tam action, which allows a private party to recover some of the amount that is due to the government under the Act.

At trial, the employees failed to introduce invoices that the primary contractors had submitted by the companies to the Navy. The subcontractors moved for judgment as a matter of law, arguing that the employees had not provided evidence that the subcontractors had violated the False Claims Act since the employees had not proven that the invoice had been presented to the Navy, since the invoices had been sent to the primary contractors instead of to the Navy itself. The district court agreed with the subcontractors, holding that the employees were required to show proof that false claims were presented to the government.

On appeal to the Sixth Circuit Court of Appeals, a divided panel agreed that proof of presentation of a false claim is required under the statute. However, the court concluded that 3729(a)(2) and (3), unlike 3729(a)(1), does not require proof that a claim was presented directly to the government for payment. Rather, the panel determined that proof of intent for a false claim to be paid by a private entity using government funds was enough to sustain a claim under the act. Accordingly, the Sixth Circuit reversed the district court. United States v. Allison Engine Co., 471 F.3d 610 (6th Cir. 2006).

The U.S. Supreme Court agreed to hear the case, though during oral argument it appeared as if the case may be derailed. An attorney representing one of the employees told the Court that though the subcontractors had not directly billed the Navy, Allison Engine had sent a “certificate of conformance” to the Navy. This prompted statements from Justices Antonin Scalia and John Roberts, who thought the case did not present the same issues that they had originally thought. However, counsel for Allison Engine responded that no such certificate had been presented, and the Court did not dismiss the case.

A unanimous Supreme Court disagreed with much of the reasoning used by the Sixth Circuit. In an opinion by Justice Samuel Alito, the Court determined that the Sixth Circuit's interpretation deviated impermissibly from the statutory language. Under the Court's interpretation, the party submitting the false claim must intend for the government itself to pay the claim. This does not mean, though, that a subcontractor must bill the government directly for the subcontractor to be liable under the statute. Where a subcontractor intends for the government to pay a bill that the subcontractor submits to the contractor, then the subcontractor may be liable if the claim is false.

Since the Sixth Circuit had based its decision in a faulty interpretation of §§ 3729(a)(2) and (a)(3), the Court vacated the panel's opinion and remanded the case to the court of appeals.