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Spot the Conflict of Interest? Federal Courts Can't in Expanding Qui Tam Suits

Washington Legal Foundation

Two recent federal appellate court opinions have expanded the availability of qui tam suits under the False Claims Act (FCA), and created new incentives for abuse. Briefly, the FCA’s qui tam provisions incentivize private parties, called relators, to bring litigation on behalf of the government by providing a relator with a share of the recovery. Like private attorney general suits, this mechanism has been criticized for its abuse by politically unaccountable individuals seeking personal gain–monetary, political, or otherwise­–and the Act’s vast expansion beyond its original Civil War era purpose.

In United States ex rel. Little v. Shell Exploration & Production Co., the Fifth Circuit, addressing “who may sue,” determined that government employees–even those whose job is to investigate fraud for the government–can bring a private qui tam suit under the FCA. The court dismissed the obvious conflict of interest problems as “extraneous” to the legal interpretation of the FCA, and found no textual basis for excluding government employees from the scope of “person[s]” eligible to bring a qui tam suits.

The court noted that in cases where allegations are first publicly disclosed by another party, government officials cannot bring suit because of the FCA’s “original source” rule. Such sources must voluntarily disclose allegations to the government. Government officials, of course, cannot be said to voluntarily disclose allegations to the government because, well, that’s their job.

Nonetheless, this limitation only applies to allegations that have been publicly disclosed, and would not bar a qui tam suit if the government employee could materially add to the public information (which, with all of their investigatory resources, ostensibly, they could.) But what’s more troubling is the circumspect incentive this limitation creates for our federal watchdogs: if a federal employee’s ability to cash in on a qui tam suit is reduced once the allegations become public, that employee has reason to race past their superiors–to whom their job requires they report–and into the courtroom. Leading FCA treatise author and attorney John Boese has noted this flaw as well. One can imagine the harm that could come to government investigations where those tasked with investigating fraud are most concerned with keeping their investigations to themselves.

In the second case, U.S. ex rel. Hooper v. Lockheed Martin Corp., the Ninth Circuit expanded the scope of the FCA by ruling that providing a bid for a government contract that is lower than expected costs–i.e. underbidding–is an actionable offense under the FCA.

Although all requests for reimbursement made pursuant to such a contract may be truthful, the court built on other circuits’ use of “fraud-in-the-inducement” to include underbids within the scope of the FCA. But it’s not clear that the purportedly fraudulent price estimate was what induced the government to accept Lockheed’s bid in the first place. The Air Force stated in its RFP that that cost was subsidiary in importance to four other factors, and specifically stated that it “may select an offer that is not the lowest priced technically accepted offer.” Indeed Lockheed’s bid was not the overall lowest bid.

There are several problems with allowing underbids to be actionable under the FCA. As Lockheed argued, it’s problematic to call a bid anything other than an estimate or prediction, subject to change. Notably, the Air Force had chosen a cost-reimbursement rather than a fixed price contract, because, as it concluded, “uncertainties inherent in the requirements render attempts to establish a fixed-price unrealistic.”

In cases like government contracts, where future costs are speculative, allowing prosecution based on underbidding provides a dangerous incentive for individuals to bring frivolous claims against innocent businesses. The relator in Hooper admitted that some of his claims were based on “guesswork and Google searches,” not actual knowledge of wrong-doing. This danger is especially prevalent where the plaintiff only need prove that the defendant had “knowledge,” not “intent.” It could be said that any company knows its bid is subject to unforeseeable changes. What’s the difference between what a Lockheed insider had called “bad, bad guesses,” what the Air Force called, “optimism,” and what a court would consider actual knowledge of underbidding?

Together these cases create new opportunities for individuals to threaten businesses with strike suits for personal gain, and risk harm to governmental investigations. Surely the FCA was never meant to encompass such plaintiffs and allegations.

Currently Director of Policy and Outreach for Washington Legal Foundation. Before joining WLF, I was a legal associate with the Cato Institute's Center for Constitutional…

Currently Director of Policy and Outreach for Washington Legal Foundation. Before joining WLF, I was a legal associate with the Cato Institute's Center for Constitutional Studies. I am a graduate of Georgetown University Law Center and a member of the California Bar.