When I speak with people who are unfamiliar with the False Claims Act, one theme that I try to emphasize is the Act’s flexibility and broad remedial purpose. The False Claims Act has been repeatedly interpreted to apply broadly to all types of fraud committed against the government. In many ways, the scope of the Act is only limited by the imagination and creativity of relators’ counsel.
Although it is not the first time, the Department of Justice recently reminded us just how sweeping the Act can be when it settled a case against TesTech, Inc., and its owners relating to set asides for “disadvantaged business entities” in transportation project contracts. Link Here: Link
Numerous government contracts, including in the transportation and defense sectors, include set-asides for business entities owned by minorities or women and require prime contractors to use good-faith efforts to find subcontractors owned by minorities or women for a certain portion of the work. The purpose of these programs is to foster and encourage business ownership by populations that have historically been excluded from such positions.
There are many possible ways to knowingly violate these programs, including falsely reporting ownership status, misleading the government about the nature of the work performed by the entity, or using the disadvantaged business entity merely as a pass-through shell that performs no actual work. In the TesTech, for example, the real owners of the company falsely asserted that it was owned by a minority in order to qualify the company for the disadvantaged business program.
Under the settlement, TesTech will repay the government almost $3 million in fraudulently obtained funds. As is more often than not the case, the suit was initiated by a former employee of TesTech, who will receive just over a half million dollars under the False Claims Act’s qui tam provisions.
Scott Grubman recently wrote an excellent article, published in the ABA’s Health eSource newsletter [link: State Entities (subscription required)], surveying the state of court decisions applying the Supreme Court’s ruling in Vermont Agency of Natural Resources v. U.S. ex rel. Stevens that certain state actors are immune from liability under the False Claims Act.
As the article points out, lower courts have struggled to develop a uniformly adopted test for implementing the Stevens decision. One of the most common tests that lower courts have used looks at whether a judgment in the case will ultimately come from the treasury of the state. But that test is not dispositive, since entities whose liability may not be covered by state funds can also be protected as “state actors.”
Another test frequently used by lower courts is the degree of autonomy exercised by the entity under consideration. The more the state and its agents control the entity and its operations, the more likely that the courts will conclude the entity is a state actor for immunity purposes.
Courts have also looked at how the relevant state’s laws treat the entity. For example, if the state itself considers the entity to be a state actor, particularly for purposes of governmental or sovereign immunity, that also weighs heavily in favor of granting immunity under the False Claims Act.
Although these are the leading tests employed by lower courts, many others have also been considered, including the nature of the work performed by the entity (does it perform traditional state functions?), the legal rights afforded to the entity (can it sue or own property?), and the sources of its funding.
Notably, one of the leading opinions on this subject is the Tenth Circuit’s decision in United States ex rel. Sikkenga v. Regence Bluecross Blueshield of Utah, 472 F.3d 702, 718 (10th Cir. 2006).
As circuit court decisions continue to flesh out these issues, it will be interesting to see whether a distinct split among the circuits occurs or whether the circuit courts eventually coalesce around a particular test or set of tests.