Defending FCA Actions Related to Pandemic Programs (Business Crimes Bulletin)

There will likely be many ill-founded False Claims Act cases coming out of the pandemic relief programs. Jones Day partners Steve Sozio, Rebecca Martin, Rajeev Muttreja, and Mark Rotatori explain how to prepare to defend against such actions.

With the federal government appropriating more than $2 trillion for businesses affected by the COVID-19 pandemic, plaintiffs' lawyers, regulators, and politicians have trumpeted the search for whistleblowers—many of whom will try to cash in on perceived fraud in the funding programs created by the CARES Act and other enactments. Indeed, the threat of False Claims Act ("FCA") liability is looming large.

The FCA authorizes private individuals (called "relators") to file lawsuits on behalf of the federal government (called qui tam suits), alleging that the defendant fraudulently obtained government funds. These suits threaten the defendant with treble damages and large financial penalties—and are very lucrative for relators, who can receive a sizable bounty of up to 30% of the recovery, and their lawyers, who can obtain attorneys' fees. With so many businesses suddenly receiving government funds, the relators' bar is eager for the possible FCA suits in the months and years ahead.

Congress and the White House rushed out these programs with ill-defined requirements. In some cases, guidance was issued after applications for the funds were already submitted, and even after funds were received. There are bound to be reasonable disagreements over what the funding terms and conditions require, and such good-faith conduct typically will not result in FCA liability.

That said, there will likely be some fraud in connection with the pandemic-related programs that should be pursued by the Department of Justice and the Inspectors General, who have said they will keep close eyes on these programs. Nonetheless, history has shown that the relators' bar will drive most of the cases and will often overreach. They will have no shortage of targets, given the many recipients of government funds, and the breadth of the requisite certifications.

The FCA, however, prohibits only a knowing violation of the law, which requires reckless or intentional misconduct. The statute is not designed to cover reasonable, though erroneous, determinations, as might result from ambiguous guidelines. Nor should minor regulatory foot faults cause FCA liability, given the statute's strict materiality requirements.

This should give businesses receiving federal funds and financial institutions processing these funding requests some comfort—although relators still may not be deterred from filing suit. For example, the Paycheck Protection Program ("PPP") requires borrowers to have certified that "the current economic uncertainty makes this loan request necessary to support the ongoing operations of the Applicant." Even with the government's recent "clarification" that applicants must "tak[e] into account their current business activity and their ability to access other sources of liquidity sufficient to support their ongoing operations in a manner that is not significantly detrimental to the business," relators may disagree with reasonable, good-faith interpretations of this standard, e.g., the meaning of "significantly detrimental to the business" and "ability to access other sources of liquidity." There may also be disagreements over whether the revised standard (which did not come from Congress) comports with the CARES Act, or whether it can be applied retroactively for purposes of FCA liability. And so on.

Also arguably open-ended is the PPP provision that applicants, "to the extent feasible," will purchase only "American-made equipment and products." What constitutes "feasible," and what does it mean to be "American-made"?

Although businesses may develop sound understandings of these and other terms—both for the PPP and other funding programs—the same terms could also be leveraged by opportunistic relators. It is thus essential that a business think carefully and critically about these and other provisions when applying for funds or retaining these funds. A reasonable, good-faith understanding of the terms should provide a sound defense if a relator or regulator comes knocking.

But because relators will be focusing on these loans and payments—and because these questions will often need to be litigated—it will be advantageous to address these issues now. Businesses would be well-advised to document their compliance with the terms governing any received funds, as well as their understanding of what those terms require. And businesses should also maintain documentation and build out their files supporting eligibility for funding as well as compliance with any requirements that seem a close call.

For many businesses, the funds provided by the government can be a critical lifeline in this difficult time—but can also risk an FCA suit that would itself be an existential threat. Accepting and retaining this money with care, and preparing now for possible investigations and claims to come, are essential.

Reprinted with permission from the June 1, 2020, issue of Business Crimes Bulletin. © 2020 ALM Media Properties, LLC. Further duplication without permission is prohibited. All rights reserved.