How exaggeration can hurt contractors

A corporate official asked the following question: On occasion our company finds itself in a dispute of some sort with one of our government customers. In these cases the agency generally asks us to estimate the potential monetary impact. Sometimes this can be difficult. In addition some people naturally exaggerate the amount at stake in these disputes. How accurately must we estimate the value of a dispute? What happens if a company overstates a dispute with the government?

Generally speaking it is extremely important that anyone submitting a claim to the federal government state the basis for the claim as accurately as possible. If a claimant intentionally or even recklessly misstates the claim he may forfeit his right to pursue the claim. Also the claimant may become liable for substantial penalties.

The Contract Disputes Act (CDA) of 1978 41 U.S.C. &sect &sect 601 et seq. governs most contract disputes between private parties and the government. According to Section 604 of the act: "If a contractor is unable to support any part of his claim and it is determined that such inability is attributable to misrepresentation of fact or fraud on the part of the contractor he shall be liable to the government for an amount equal to such unsupported part of the claim in addition to all costs to the government attributable to the cost of reviewing said part of his claim."

To establish liability under this provision the government must show that the contractor had the intent to deceive or mislead. [Al Munford Inc. v. United States 34 Fed.Cl. 62 67-68 (1995)] If the government is aware of the false information at the time the claim is made then there is no intent to deceive as required by Section 604. [Chemray Coatings Corp. v. United States 29 Fed.Cl. 278 (1993)]

The False Claims Act 31 U.S.C.&sect 3729 is a more generally applicable statute and covers government contracts. Under the act a person can be held liable for knowingly submitting a false claim to the government. However a claim is "knowingly" false if submitted with actual knowledge of the truth or in deliberate or reckless disregard of the truth. The penalties for submitting each false claim are between $5 000 and $10 000 plus three times the amount of damages sustained by the government as a result of the false claim.

Numerous precedents highlight how seriously government agencies take this issue. The courts have noted that "innocent mistakes mere negligent misrepresentations and differences in interpretations" are not considered to be false claims under the act. [United States ex rel. Hopper v. Anton 91 F.3d 1261 1267 (9th Cir. 1996)]

However proving a specific intent to deceive is not required.

For example in Hagood v. Sonoma County Water Agency 81F.3d 1465 (9th Cir. 1996) the alleged fraudulent activity was the defendant's request for payments that were based on an improper allocation of costs. According to the court the evidence in that case indicated that although the allocation was imprecise it was not "false" within the meaning of the False Claims Act. Instead the defendant had merely taken advantage of a disputed legal issue. Id. at 1478.

In United States v. TDC Management Corp. 24 F.3d 292 (D.C. Cir. 1994) the federal government charged that TDC omitted information in the submission of monthly progress reports.

According to the court the government had to prove either the contractor knew it had omitted required material information from the reports or it recklessly disregarded or deliberately ignored the inclusion of the information. However the government was not required to prove that the contractor specifically intended to deceive the government by omitting the information. Id. at 298.

Avoiding Taint

In addition the government may "avoid" a contract that is tainted by fraud kickbacks conflicts of interest or bribery. See for example Godley v. United States 26 Cl.Ct. 1075 (1992). This is an equitable principle under which the courts try to reach a "fair" result in certain cases. Under this principle the courts may treat the parties as though no contract exists if that is the most fair remedy for the party who was damaged by the fraud.

Under the laws establishing the Court of Federal Claims (COFC) in which many claims against the government are litigated a fraudulent claim is subject to forfeit. See 28 U.S.C. &sect 2514. Those particular laws apply only to claims over which the COFC has jurisdiction. See Davis v. Farmers Home Administration 785 F.2d 926 (11th Cir. 1986). However other forums in which claims may be pursued may have similar rules.

Clearly before submitting any claim to a government agency it is important to subject it to close scrutiny to ensure that it is not false or misleading.

Peckinpaugh is a member of the government contracts section of the law firm of Winston & Strawn Washington D.C. This column addresses legal topics that arise in government acquisition and management of ADP resources. Readers are encouraged to submit topics by e-mail to carl@carl.com. This column discusses legal topics of general interest only and is not intended to provide legal advice. Should you have a specific question or legal problem consult an attorney.