False claims can take a big bite out of a company

Infotech and the law | Legal insights for today's market

A company has submitted regular monthly billings to the government under its information technology services contract based on time sheets that employees accurately completed each week. But unknown to management, the program manager running the project was having difficulty filling positions and hired people to fill two of 25 positions who lacked the six years of experience required for the labor category to which they were assigned.

These two individuals would qualify for a different labor category, which would be billed at 80 percent of the rate charged for the positions. The contracting officer has deemed all the work satisfactory and accepted it. The company has received favorable reviews and has been asked to bid on future work for the agency.

Before contract closeout, management learns that the two employees lacked the qualifications for the positions in which they had been employed on the earlier contract. Management recognizes that this presents a potential problem and decides to resolve it by taking a forthright approach. A meeting with the contracting officer is requested.

At the meeting, management discloses that the company has discovered that two people's work was inadvertently billed at an incorrect rate. The company offers to refund the full amount of the overpayment, which is the difference between the actual amount billed and the amount that should have been billed for less-experienced people. The contracting officer acknowledges that the work was satisfactory, she is happy to accept the refund as a contractual adjustment and agrees to issue a contract modification. The refund is paid, and the contact is closed out.

Six months later, the company receives a demand from the Justice Department for all company records related to the contract. This is followed by an invitation to attend a meeting where government attorneys say the company is about to be sued for treble damages under the False Claims Act and debarred. The company is offered the opportunity to settle the claim by making a payment equal to the full price the government paid for the project.

This account affords several important lessons. First, leaving aside health care fraud, misrepresentation of the qualifications of employees on service contracts billed at hourly rates is among the most prevalent forms of false claims. Shortage of qualified workers, particularly those with security clearances, has led to increasing substitution of employees whose education or experience falls short of the required minimums. A company needlessly exposes itself to risk when it succumbs to the temptation to substitute less-qualified people.

Second, if the government is billed based on misrepresentation or fraud, the contracting officer does not have authority to settle or waive the government's claims for the resulting overpayment. Only the Justice Department has the authority to settle such claims. The company in this case may have taken appropriate steps to resolve the matter as soon as it came to the attention of management. But because management dealt only with the contracting officer, it left itself open to having the matter reopened. Settlement of a potential false claim without appropriately experienced professional help is another needless risk.

Third, the remedy seems draconian, and under the law as it stands today, the government's demand probably would be much lower. However, under legislation making its way through Congress, the measure of damages for false claims will change. In the example provided, the damages would be the 20 percent difference in price between the two labor categories. But under the new law, the damages would be three times the full price the government paid for the work. The cost of false claims is going up.

Jonathan Cain (jtcain@mintz.com) is a member of law firm Mintz Levin.

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