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LAWSUITS
False Claims Can Bring Real Pain
By Eric M. Kerness
False claims lawsuits have long been
prevalent in health-care and defense. But now the focus has
turned to the construction industry and contractors need to
take action to protect their reputations and pocketbooks.
On June 28, 2004, a Los Angeles Superior
Court Judge handed down a judgment against Oved & Associates
Construction Services Inc., ordering the firm to pay the Los
Angeles County Metropolitan Transportation Authority $5.2
million for allegedly submitting false claims and violating
federal regulations in its Metro Red Line construction project.
Oved plans to appeal the decision.
In another construction case involving
the Metro Red Line in June 2001, a $63-million judgment was
entered on behalf of LAMTA against Tutor-Saliba-Perini J.V.
for alleged violations of the California False Claims laws.
The case has been appealed.
Both of these cases involve the California
False Claims statute, which is patterned after the Federal
False Claims Act. The federal statute was passed in 1863 to
combat fraud perpetrated against the Union Government during
the Civil War. Since its amendment in 1986, more than $6 billion
has been recovered.
Prosecution under the federal statute
can take place only if federal funds are involved. Eleven
states have their own false claim laws and many other states
are considering enacting similar statutes.
In general terms, civil liability is
imposed on the contractor if it "knowingly" presents
to the government a false claim for payment or approval. Typical
cases involve false credentials, records, certifications,
invoices, inflated claims, overcharging for wages and overhead
and improper substitution of materials. The government can
recover treble damages as well as civil penalties of $10,000
for each violation in addition to costs and attorney fees.
Negligence and carelessness do not create false claim liability.
Actual intent to defraud is not required
but liability can be established if the government can prove
that one had actual knowledge of the falsity of the information,
acted in deliberate ignorance of the truth or falsity of the
information, or "acted in reckless disregard of the truth
and falsity of the information." But what can contractors
do to avoid liability?
False claims can have devastating consequences
on a construction firm. If you are doing business with the
state or federal government, false claims need to be on your
radar screen. The following measures can serve to greatly
mitigate false claim liability:
Treat all
certifications seriously. Special attention should
be paid to certifications required by today’s construction
contract provisions. False certifications can have serious
consequences, such as debarment and findings of non-responsibility.
Contracting parties should give special attention to disadvantaged
business enterprise regulations and requirements to avoid
false certifications and improper pass-thru arrangements.
Scrutinize
labor rates. Insure that the labor certifications are
accurate. If you are uncertain about the correct wage rate,
seek clarification rather than blindly certifying compliance.
Avoid inflated
claims. Too often, contractors inflate claims to allow
subsequent downward negotiation and a "fair" settlement.
This practice exposes contractors to significant damages.
Refrain from
unusual pricing schemes. Damage claims should reflect
the amounts in a company’s actual cost records because
today’s owners often incorporate audit provisions in
their standard contract provisions and the contractor’s
records are usually discoverable. Otherwise, inconsistencies
may be used to prosecute the contractor for false claims.
Review subcontractor
claim submissions. Contractors should not pass through
subcontractor claims without review. A reasonable effort
should be made to evaluate the merits of the subcontractor’s
claim before it is submitted to the government.
Remember to be alert, proactive and cognizant
of potential false claims. If you find yourself in a questionable
situation, cooperate with the government. Doing so can reduce
exposure and damages.
Eric M. Kerness is Vice President of
Transportation Services for PinnacleOne, Hartford, Conn. He
can be reached at ekerness@pinnacleone.com.
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