On November 6, 2020, a D.C. District Court judge ruled that a whistleblower bringing a suit under the False Claims Act (FCA) need not allege “materiality” when relying on the “fraud in the inducement” theory of falsity. 

Over the years, Congress and federal agencies have enacted a variety of efforts to boost certain contractors. Under these programs, the government sets aside certain contracts for contractors who may have a special status.  For instance, under a 2006 federal statute, the Department of Veterans Affairs (VA) has the authority to set-aside certain contracts for Service-Disabled Veteran-Owned Small Businesses (SDVOSBs) and Veteran-Owned Small Business (VOSBs).  It is not surprising, then, that a contractor who applies for such a status and falsely claims that he or she meets all of the requirements may face potential liability under the FCA. 

The FCA states that a person who “knowingly presents … a false or fraudulent claim for payment or approval” may be liable for treble damages and civil penalties. The FCA does not define what constitutes a “false or fraudulent claim,” so courts have stepped in and established three ways in which a claim can fit that description. In the most straightforward case, a claim is “false” if it includes “an incorrect description of goods or services provided” or a “request for reimbursement for goods or services never provided.” Under the “fraud in the inducement” theory, a claim can be false or fraudulent is if it is submitted pursuant to a contract that was procured by fraud. Most recently, the U.S. Supreme Court recognized the “implied false certification” theory of liability under which a claim is false or fraudulent if the person submitting it knowingly fails to disclose noncompliance with certain requirements and knows that such noncompliance is material to the government’s decision to pay. 

Back in August of 2014, a qui tam whistleblower filed a complaint under the False Claims Act (FCA) against several government contractors. The whistleblower alleged that the contractors effected a scheme to submit bids and obtain millions of dollars in government construction contracts by fraudulently claiming or obtaining SDVOSB and other special statuses for which they were not eligible.  The litigation is ongoing, but this year, the defendants moved to dismiss the claim on the grounds that the whistleblower failed to allege materiality as required under the “implied false certification” theory of liability.  The D.C. District judge overseeing the case denied the contractor’s motion. In his ruling, the judge explained that blatantly lying about eligibility for a special status is more than mere noncompliance with a requirement (i.e. implied false certification) — it is fraud in the inducement.  The judge declined to require that the whistleblower meet the materiality requirement and found that “plaintiffs suing under the fraud in the inducement theory need only allege that false statements induced the government to award the contract, not also that those false statements were material to the government’s decision to pay the party under the contract.”

For now, this ruling has limited reach with respect to other federal courts, but it should nevertheless serve as a warning that a failure by a whistleblower (or the government) to meet the “materiality standard” may not be enough to escape liability under the FCA.  

The case is captioned United States ex. rel. Scollick v. Narula, et al., No. 14-cv-1339 (D.D.C.).

The attorneys at Chilivis Grubman represent clients of all types and sizes in civil actions and government investigations brought under the False Claims Act and similar state statutes. If you need assistance with such a matter, please contact us today.