July 13, 2009

The Minnesota False Claims Act: What Contractors Should Know About the New Law

From 1986 to 2008, the federal government recovered more than $21 billion in settlements and judgments resulting from federal False Claims Act (FCA) cases, with more than $1 billion recovered in 2008 alone. In the 2009 legislative session, the Minnesota Legislature passed its own version of the FCA.

The Minnesota FCA closely mirrors the federal FCA, imposing civil penalties and treble damages against contractors who submit false claims to public bodies in Minnesota. However, unlike the federal FCA, the Minnesota FCA contains a safe harbor provision that applies under certain circumstances. A comparison of the federal and the Minnesota FCA, along with a brief look at federal case law and recent amendments to the federal FCA, provide insight into Minnesota's new law and how Minnesota courts may interpret it.

Federal False Claims Act

The federal FCA imposes a penalty of $5,500 to $11,000 for each false claim submitted to the government, plus three times the amount of damages sustained by the government. 31 U.S.C. § 3729. Suspension or debarment from work on future government projects is also an available remedy. In addition, recent changes to the federal FCA now make it a violation to submit a false claim to any person if the ultimate beneficiary of the work is the federal government, thereby making subcontractors liable for false claims submitted to general contractors on federal projects. The federal FCA also provides that an individual who sues on behalf of the government, referred to as a "relator" in a qui tam action, is entitled to 15 to 30 percent of the damages recovered. Attorney fees also may be awarded to the prevailing party.

These tough penalties can result in massive damage awards against contractors on federal projects. A cautionary example of a false claims settlement arose out of the "Big Dig," a major public transportation infrastructure project built through downtown Boston. Bechtel Infrastructure Corp. and PB Americas Inc. worked on the Big Dig for 20 years, overseeing design and construction of the project. The United States and Massachusetts governments alleged that PB Americas and Bechtel submitted false claims relating to four aspects of the project, and the two companies ultimately agreed to pay $23 million to the United States and more than $40 million to the state of Massachusetts to settle these allegations. The settlement also included a $150,000 recovery for the whistleblower who commenced the qui tam action against the two companies.

Minnesota False Claims Act

Because there is similar potential for significant penalties under the Minnesota FCA, it is important to know what constitutes a "false claim" under the new law. A "claim" is broadly defined under the Minnesota FCA as any request or demand for money or property made by a contractor to the state. Minn. Stat. §§ 15C.01 to 15C.16. A person violates the Minnesota FCA if he or she knowingly presents a false claim for payment, uses a false record to get a claim paid or approved, or knowingly conspires to defraud the state by submitting a false claim or using a false record to obtain payment.

One Must "Knowingly" Submit a False Claim

The Minnesota FCA, similar to the federal FCA, requires that a person submit a false claim "knowingly." Knowingly means that a person either has actual knowledge of the falsity of the information, or acts in deliberate ignorance or reckless disregard of the truth or falsity of the information.

It is important to note that no specific proof of intent to defraud is required to commit a violation of the federal or the Minnesota FCA. For example, requesting payment based on information that a person knows or should know is inaccurate—such as an incorrect schedule of values—can result in a violation, even if there is no intent to defraud the government. Unlike the federal FCA, however, the Minnesota FCA clarifies that a person who acts merely negligently, inadvertently or mistakenly does not violate the act.

Whistleblowers Can Sue Under the Minnesota FCA

Similar to the federal FCA, the Minnesota FCA allows a whistleblower or private citizen, called a "relator," to file a lawsuit, or qui tam action, against a contractor and receive a certain percentage of the recovery in the action. Often, a relator is a disgruntled employee or an insider at a private company who discovers some problem in the administration of a government contract. However, disappointed bidders, subcontractors and labor unions have also acted as relators.

If the state intervenes in an action brought by a relator, the relator is entitled to 15 to 25 percent of the recovery. If the state does not intervene in the action, the relator is entitled to 25 to 30 percent of the recovery. The potential relator's share of any recovery provides a strong incentive for whistleblowers (and their attorneys) to commence FCA actions. In 2008, relators were awarded $198 million in federal FCA qui tam actions. The potential for similar recoveries under the Minnesota FCA provides strong incentives for whistleblowers to commence qui tam actions.

Defenses Under the Minnesota FCA

Safe Harbor Provision

A unique provision in the Minnesota FCA, not found in the federal FCA, provides a safe harbor against FCA liability under certain circumstances. Unless there is proof of specific intent to defraud the state, a person is not liable under the Minnesota FCA if: (1) the person is informed by the original source that false claims have been made against the state, and (2) the person repays the amount of actual damages to the state within 45 days after being so informed. Establishing an "FCA compliance office," i.e., a formal structure for employees to report potential false claims, makes it easier for a contractor to avail itself of the safe harbor, because if a contractor has a compliance office, the contractor is not considered to have been informed of the false claim until the original source reports it to the compliance office.

Statute of Limitations

The Minnesota FCA, like the federal FCA, places time limits on the commencement of FCA actions. Under the Minnesota FCA, an action may not be commenced more than three years after the date of discovery of the fraudulent activity by the prosecuting attorney or more than six years after the fraudulent activity occurred, whichever occurs later. In no event can someone commence an FCA action more than 10 years after the date on which the violation is alleged to have occurred.

Public Disclosure

The Minnesota and the federal FCA both prohibit the commencement of qui tam actions following public disclosure of false claims allegations. A whistleblower cannot maintain a qui tam action, and thereby collect a share of any recovery, if there has been public disclosure of the allegations, such as through the news media, unless the person commencing the action is the original source of the information and has direct and independent knowledge of the fraud. Independent knowledge "has been consistently defined as knowledge that is not dependent on public disclosure." Direct knowledge means the person has first-hand knowledge of the fraudulent misconduct, without an intervening agency.

Damages Permitted Under the Minnesota FCA

Monetary Damages and Attorney Fees

Identical to the federal FCA, the Minnesota FCA allows $5,500 to $11,000 per false claim plus three times the amount of damages actually incurred by the state. The repeated submission of similar claims over a period of months—such as monthly payment applications—can result in multiple violations, with penalties assessed separately for each one. Moreover, if the state or a relator wins an FCA action, the defendant may also be liable for attorney fees and other reasonable costs. Conversely, if the defendant prevails against a relator, the relator may be liable for reasonable costs and attorney fees incurred by the defendant, but only if the court finds the lawsuit was clearly frivolous or brought to harass the defendant. The state cannot be held liable for attorney fees or costs under any circumstances.

Alternate Remedies: Suspension or Debarment

In today's construction economy, the ability to pursue public projects may be critical to a company's survival. The Minnesota FCA, like the federal FCA, provides that, in addition to monetary penalties, the state may also pursue "alternate remedies" for FCA violations. The most common of these alternate remedies are suspension of a contractor from bidding on public projects for a period of months or years, or permanent exclusion of the contractor from such projects, also known as debarment.

The threat of suspension or debarment from state or federal projects can be more damaging to contractors than monetary sanctions, because almost all public entities (and many private owners) require contractors to disclose suspensions or debarments as part of the bidding process, thereby making it more difficult for those contractors to obtain work generally. Accordingly, the federal government routinely uses the threat of suspension or debarment to obtain favorable settlements of FCA cases. Contractors can expect the state of Minnesota to behave in similar fashion.

Limitations on Damages

Like the federal FCA, the Minnesota FCA imposes a penalty of "three times the amount of damages that the state or the political subdivision sustains because of" the FCA violation. However, federal case law has limited the federal government's ability to recover treble damages by requiring the government to prove it was actually damaged before there can be any trebling.

For example, in Daewoo Engineering & Construction Co. v. U.S., 557 F.3d 1332 (Fed. Cir. 2009), Daewoo contracted with the U.S. government to build a road in the Republic of Palau. Two years later, after major weather delays, Daewoo sought adjustment of the contract price and submitted a claim for an additional $64 million. The U.S. Court of Federal Claims and, later, the U.S. Court of Appeals for the Federal Circuit found that $50.6 million of Daewoo's $64 million claim was unsubstantiated, submitted solely as a negotiating ploy, and therefore fraudulent. Under the Contract Disputes Act (a separate federal law with its own anti-fraud provisions), Daewoo was required to pay the government a penalty equal to the full amount of its fraudulent claim (i.e., $50.6 million) and forfeit its remaining $13 million affirmative claim. However, Daewoo was only fined $10,000 under the FCA, because the courts concluded that the government did not sustain actual damage as a result of Daewoo's false claim (the government did not pay the claim), and therefore, the government was not entitled to treble damages.

Another limitation on damages found in both the Minnesota and the federal FCA is a provision which allows a contractor to avoid exposure to treble damages by self-reporting FCA violations. If, prior to the commencement of a formal investigation, the contractor provides information to the government about a suspected FCA violation and then cooperates fully with any subsequent investigation, the government will be limited to recovering double damages rather than treble damages.

Employer Liability Under the Minnesota FCA

Vicarious Liability

A major difference between the Minnesota FCA and the federal FCA is that, under the Minnesota FCA, an employer is not liable for an act committed by a nonmanagerial employee unless the employer "had knowledge of the act, ratified the act, or was reckless in the hiring or supervision of the employee."

This is an important distinction because the federal FCA imposes vicarious liability on employers for the acts of their employees. For example, in U.S. ex rel. Shackelford v. American Management Inc., 484 F. Supp. 2d 669 (E.D. Mich. 2007), the employer had no knowledge of a scheme among several employees to submit bogus purchase orders, yet the company was held vicariously liable for the resulting FCA violations.

However, it is important to note that the vicarious liability limitation under the Minnesota FCA only extends to nonmanagerial employees and only under the specific circumstances listed above. Vicarious liability still exists for the acts of managerial employees, which designation extends to numerous employees on a typical construction project.

Whistleblower Protection

Similar to the federal FCA, the Minnesota FCA holds employers liable for retaliation against whistleblowers who act in furtherance of the FCA—for example, by bringing an action as a relator. In addition to protecting employees, the recently amended federal FCA now protects contractors and agents of employers that help uncover FCA violations. In contrast, the Minnesota FCA whistleblower protection only applies to employees. The consequences of violating these provisions can include employer liability for damages in a civil action, reinstatement of the employee, payment of twice the amount of the employee's lost compensation, plus interest, and special and punitive damages. Federal case law has held that an employee must act specifically under the FCA in order for the whistleblower protections to apply.

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