The False Claims Act: From Shoddy Civil War Uniforms to Costly Defense Contracts in 2014

As readers of this blog know, the False Claims Act (“the Act”) is an important tool for combatting health care fraud. The Act allows our Northern California whistleblowers’ law firm to partner with private whistleblowers to fight back against schemes that divert tens of billions of dollars from Medicare, Medicaid, and other health care programs annually. This is a critically important battle, but the Act goes well beyond health care and defense contract fraud is one important example. A recently filed case illustrates the Act’s role in fighting the costly problem of fraud in military contracting. Further, the Act’s history serves as a reminder of the threat to our military personnel when companies try to cheat the government.

Government Joins Suit Alleging Defense Contract Fraud
On Thursday October 16, the Department of Justice (“DOJ”) issued a press release announcing that the government was joining a whistleblower complaint against Sikorsky Aircraft Corporation(“Sikorsky”), a subsidiary of United Technologies Corporation, and two Sikorsky subsidiaries. Originally, the case was filed under the Act’s qui tam provisions by a former employee of the subcontractor. A representative of the DOJ’s Civil Division explains the decision to intervene: “Today’s complaint demonstrates, once again, that the Department of Justice will not tolerate contractors who engage in schemes to defraud the armed forces or any other agency of the United States.”

The claims involve Sikorsky’s alleged approval of a cost-plus-a-percentage-of-cost subcontract. Such contracts are sometimes used when the cost of performance is not known upfront; compensation is calculated based on cost to perform plus a set percent of that cost. Defense/military contracting rules prohibit these arrangements because they provide no incentive for contractors to control costs. The complaint alleges Sikorsky approved an illegal subcontract and used it to overcharge the Navy for parts and materials used for aircraft maintenance. Echoing the DOJ official’s comments, U.S. Attorney James L. Santelle explained: “”Under the authority of the False Claims Act, we pursue fraud of this sort to ensure that taxpayer dollars are spent lawfully and that overcharges and other types of contracting misconduct are addressed.”

The Act’s History: Financially Strapped Civil War Era Congress Looks to Whistleblowers to Fight Fraud Endangering Union Soldiers
Earlier this month, KRCU, an NPR station at Southeast Missouri State University, reported on the history of the False Claims Act and its modern role. The report explains that the Act that has led to the recovery of tens of billions already this year began as a way to protect Union soldiers during the Civil War. Union troops relied on private contractors for a range of necessities, but contractors often cut corners and they found themselves with uniforms that dissolved in rain, horses that were weak and even blind, and gunpowder mixed with sawdust. Since the government lacked the money to investigate these frauds, Congress created an incentive for private citizens to report on their employers by promising to pay the employee half of any fine collected.

When the Civil War ended, the law was weakened and all but forgotten until the 1980s. As reports of outrageous military spending surfaced, Congress resurrected (and revised) the Act. Whistleblowers became increasingly important, this time reaching beyond military contracts to areas such as health care and pharmaceuticals.

Fighting Fraud in 2014
The report expresses some doubt about the Act’s current power to reduce fraud given that, in contrast to an era when companies were smaller and fines could bankrupt an organization and its leaders, shareholders tend to foot the bill following a claim and there is not personal accountability. However, the report doesn’t point to direct evidence of this assertion. Regardless, it is clear that legislation that began as a way to protect an army now helps the government recover billions of wrongfully diverted funds.

It is also clear that whistleblowers remain critical, in part because the size of companies makes it difficult if not impossible for an outsider to pinpoint fraudulent acts. If you have witnessed any form of government contracting fraud, including fraud in defense contracting as well as fraud tied to government health care programs, coming forward can provide both moral and financial rewards. In today’s environment, partnering with a law firm that understands the False Claims Act (including its whistleblower protections and potential rewards) is a necessity. Call any of our Northern California government contracts fraud law offices to arrange a meeting to discuss in greater detail how a Civil War era concept can fight modern day fraud.