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Labor Logic

By: dmc-admin//February 4, 2004//

Labor Logic

By: dmc-admin//February 4, 2004//

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Prosser

John D. Finerty, Jr.

In August 2003, Lockheed Martin Corporation agreed to pay $37.9 million to settle government allegations that it inflated costs on four Air Force contracts to offset overruns on another Air Force contract. A former employee triggered the government’s investigation and, for his tip, recovered $8.75 million of the settlement amount.

In 2001, the government recovered $15.7 million from a separate contractor that allegedly made false claims in the course of providing pipe for a Department of Transportation contract.

Last month, the Wisconsin Department of Transportation accused two construction contractors of bid-rigging and suspended them from bidding on any further projects. Liability under federal or state false claims acts can, therefore, be devastating. A few simple steps will help business owners and their attorneys reduce liability in these types of cases.

The Multiple Risks to Companies

Company owners and supervisors are at risk of incurring liability, both civil and criminal, for false claims. It is critical that companies with government contracts, or those bidding for government work, get reliable information from employees working in the field. Some employees think they are helping the company by miscounting the number of truckloads on a project, for example, but they are opening the company up to substantial liability on multiple fronts.

That is, not only is the government authorized to sue under the False Claims Act, but private citizens may also sue on behalf of the government to recover federal funds obtain by fraudulent means. If the case concludes successfully by settlement or verdict, the citizen may recover a percentage of the proceeds, including damages and penalties. This statutory scheme creates incentives for employees and non-employees alike to monitor for and report questionable conduct by government contractors.

Government contractors typically provide invoices that request payment on federal or state projects. The records that workers in the field turn in can qualify as false claims and trigger liability if the records are not accurate or if a well intentioned employee makes a few unauthorized changes to company documents. For example, progress payments based on inaccurate accounts of the amount of work already done may trigger the liability, even though the employee makes a good faith estimate or includes work he or she intends to complete, but simply has not gotten to yet. Employment policies that help ensure the integrity of information from the field are a good first step to reducing liability.

The Possible Penalties

The federal False Claims Act imposes civil penalties of not less than $5,000, but not more than $10,000, plus up to three times the amount of damages the government sustained because of the violation. Each separate false claim or violation triggers the Act’s civil penalties. In one case, a company submitted more than 105 fraudulent vouchers under wire and cable supply contracts with the Army and Navy. Each fraudulent voucher constituted a separate claim. In that particular case, the court awarded $2,000 for each of the 105 false claims, for a total of $210,000 — and then doubled the damages.

Preventative Employment and Contract Fulfillment Policies

In order to reduce false claims liability, companies and attorneys should analyze three phases of the government contracting process. First, at the contract formation stage, it is important to support bids and cost estimates with documents. It is also important to train employees so they understand the bidding process and know when they can trust the company’s approved vendor list. Contracts may also be written to shift false claims liability to subcontractors and suppliers based upon their conduct, such as offering company employees gifts or cash for favorable treatment.

The second area to monitor is the contract performance stage. Managers and owners should carefully review all payments received and requests for progress payments done by employees. Also, verify the performance of all subcontractors. Cost tracking is important to avoid double billing or other unintentional errors that may trigger false claim liability. As lawyers have stated thousands of times, get all contract changes or other requests in writing.

At the post performance stage, re-verify performance and proper payment. If your company or client is in trouble despite its best efforts, consider a few case handling strategies. As with most compliance issues, the longer an investigator or expert has to review documents, the more likely it is that he or she will find additional violations.

Having good information, in writing, may help expedite matters to the client’s benefit. Also, take the initiative and inform the government agency of a False Claims Act violation immediately. Remember, an innocent mistake can probably be explained. The cover up is usually more difficult and expensive to defend than the truth.

For more information on this case or for assistance in defending a case under the False Claims Act, contact John D. Finerty, Jr. at Michael Best & Friedrich in Milwaukee at (414) 225-8269 or on the Internet at [email protected] or Charles V. Sweeney at Michael Best & Friedrich in Madison at (608) 283-0102 or on the Internet [email protected].

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