A D.C. District Court Judge issued an November 6 ruling on a key False Claims Act (FCA) whistleblower case that may have repercussions for years to come. Judge Royce C. Lamberth ruled in the case of United States ex rel. Scollick v. Narula that a controversial “materiality requirement,” used mostly by companies trying to escape allegations of submitting false claims to the government, does not apply to the defendants in the case.
Because of a Congressionally enacted effort to uplift certain contractors, the government sets aside certain construction contracts for contractors who have special statuses, such as the Service Disabled Veteran Owned Small Business (SDVOSB) status, HUBZone status, or Section 8(a) status. Andrew Scollick, a former employee of Centurion Solutions Group and Citibuilders Solutions Group (CSG) and the whistleblower in the case, alleges that several defendants played roles in a fraud scheme that resulted in three separate contractors submitting false claims to the United States under these special government contracting programs when they did not qualify for them. He claims that GSC was actually a shell company with a service-disabled veteran placed at the top of the company only as a figurehead so that the group actually running the company could collect SDVOSB contracts. Optimal Solutions and Technologies, Inc., and two of its directors (collectively OST) are among the defendants accused of running the scheme.
This case has already pushed boundaries and clarified formerly unclear parts of the FCA. In a previous decision in favor of Scollick, Lamberth ruled that if the insurance companies providing required surety bonds to non-compliant SDVOSB groups had knowledge that the contractors were misrepresenting their SDVOSB status, the insurance companies themselves could be liable. After this key ruling expanded the scope of the case to include the insurance companies, the attention of the court turned towards the question of materiality.
In the 2016 Supreme Court decision Universal Health Services, Inc. v. United States ex rel. Escobar, the Court made it harder for a plaintiff to show that a claim was material to the payment of the defendant by the government in order for the defendant to be liable under the FCA. The FCA requires the plaintiff to prove that the claims made by the defendant had “a natural tendency to influence, or [were] capable of influencing” the government to fulfill the contract and actually pay the claim. In Escobar, the Court made it easier for defendants in false claims cases to argue that their original false claim was not “material” to each specific instance of the government paying them, especially if the government had knowledge that some of their requirements for the payment were not met but did nothing to stop payment or restructure the contract. Under this expanded defense, the plaintiff has to prove that the original false claim was material and connected to every payment the government made to the defendant.
OST has defended themselves in this way, claiming that Scollick had to prove that OST’s misrepresentation of GSC as a SDVOSB was material not only for CSG to be awarded SDVOSB contracts, but also to the government’s decision to pay GSC under those contracts. Lamberth’s November 6 decision disagreed with this assertion. The decision aligns with the “fraudulent inducement” theory that if the contract was obtained through fraud, all further payments based on the contract may be considered fraudulent. In cases where the contract was awarded resulting from fraudulent misrepresentation, Lamberth ruled the materiality defense as insufficient. The court ruled that if a contract was acquired through fraud, each instance of payment will also be fraudulent. In the decision, the court stated that “a fraudulent statement that secures a government contract will always be material to the government’s decision to pay the contractor under the agreement.”
The court denied OST’s motion to dismiss the case and allowed it to continue. This decision lowers the requirements for what the plaintiff must prove in cases of fraudulent inducement. The previous standard requiring that the plaintiff prove a materiality connection between the fraudulently obtained contract and every payment the government made to the defendant put considerably more pressure on the plaintiff and may have allowed companies to escape liability for payments they received fraudulently.
The FCA is known as one of the most effective tools that the government has to fight corporate fraud and fraudulent contracting of taxpayer money. This decision may encourage more whistleblowers like Scollick to stand up and report fraud when they see that whistleblowers get a fair day in court. The outcome of this case also might send a message to whistleblowers not to be stymied by complicated legal defenses that cleverly navigate around the clear intention behind the FCA.