False Claims Act Liablity for Construction Management Firms Retained by State Entities

Edmund V. Caplicki III1

1

Associate, Wickwire Gavin LLP, 725 South Figueroa St., 38th Floor, Los Angeles, CA 90017. E-mail: ecaplicki@la.wickwire.com

Background
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Construction management rms are often hired by public entities to oversee planned and ongoing projects. These public entities frequently seek and receive funding from the federal government for their projects. Construction management rms must be wary of materials provided to the federal government on behalf of their public entity clients because of the threat of federal False Claims Act FCA liability. The False Claims Act imposes civil penalties for fraudulent attempts to induce the government to pay money. False claims usually take the form of invoices or other requests for payment but may also include false certications of compliance with contract documents. The penalties for such false claims include nes of $5,000 to $10,000 per false claim, plus three times the amount of damages sustained by the government the amount paid or sought to be paid. The United States Court of Appeals for the Ninth Circuit, in United States ex rel. Ali v. Daniel, Mann, Johnson & Mendenhall,1 recently held that a construction management rm retained by a state entity is not immune from False Claims Act liability and may be held liable for making false representations to the federal government regarding a proposed project.

alleging that the parties had no intention of occupying the buildings and therefore presented false claims to FEMA relating to the Northridge earthquake in violation of the federal False Claims Act.2 The claims against CSUN and the CSUN employees were dismissed pursuant to a stipulation, leaving DMJM as the only remaining defendant. DMJM then subsequently moved for summary judgment, seeking dismissal of the claims against it on the ground that the DMJM employees were acting as agents of CSUN and, accordingly, were entitled to immunity from liability under the FCA. The District Court agreed with DMJM and dismissed the claim.

Court of Appeals Analysis of False Claims Act Liability

The Court of Appeals for the Ninth Circuit Court reversed the District Court and found that DMJM was not entitled to immunity from the FCA allegations. Under the FCA, states are not persons subject to liability. DMJM, however, was a private corporation and thus fell within the denition of person under the FCA. Unless DMJM could show it shared CSUNs sovereign immunity because of its relationship with CSUN, DMJM would be potentially liable under the FCA. The Court rst rejected the district courts analysis that the DMJM employees who allegedly wrote the memorandum and letter were the equivalent of state employees and thus immune from liability. The Court pointed out that DMJM and not the employees was the entity sued by Ali and at no time were the DMJM employees employed by CSUN. Furthermore, Alis allegation that DMJM was an agent of CSUN was insufcient to confer immunity if it is shown DMJM or its employees knowingly submitted false claims to FEMA. The Court also rejected DMJMs argument that it was entitled to sovereign immunity under the contractor defense, which shields federal contractors from liability where the contractor causes injury in performing work at the direction and per the specications of the government. Because the FCA requires that those held liable knowingly submit false claims, there is little danger of corporate contractors being held liable for innocent conduct. Likewise, an analysis under the federal Tort Claims Act was also dismissed by the Court. Finally, the Court found that DMJM did not satisfy the armof-the-state test for sovereign immunity. Under that test, the court is to consider 1 whether a money judgment would be satised out of state funds; 2 whether the entity performed central government functions; 3 whether the entity may sue or be sued; 4 whether the entity has the power to take property in its own name or only in the name of the state; and 5 the corporate status of the entity. Although managing the reconstruction of state university buildings may well constitute a central government function, DMJM clearly failed to meet the other four elements of the arm of the state test.

The Case
In January 1994, southern California was hit with the Northridge earthquake. California State University, Northridge CSUN retained Daniel, Mann, Johnson & Mendenhall DMJM as its construction management rm for the reconstruction of buildings damaged by the Northridge earthquake. CSUN sought and obtained Federal Emergency Management Act FEMA funding for some of the earthquake reconstruction. As part of its funding application, DMJM, on behalf of CSUN, submitted a memorandum and letter to FEMA stating that one of the buildings, the University Tower Apartments UTA, although unoccupied at the time of the earthquake, had been closed due to modications to bring the building into compliance with current code requirements, and that an architectural report commissioned by CSUN clearly indicates the Universitys intention to re-occupy the facility to its intended use. It was, at the time of the earthquake, conducting due diligence studies to bring the facilities back into operation. These communications were critical to FEMA funding because, according to the Court, applicable FEMA regulations provided that buildings not in use at the time of the earthquake were ineligible for funding unless, prior to the disaster, the owner had an intent to re-occupy them within a reasonable time. A former architect employed by CSUN, A. Amir Ali, led a Qui tam complaint against CSUN and two CSUN ofcials and later amended the complaint to include a claim against DMJM

Analysis of Alleged False Claim

For all of the above reasons, the Court found DMJM was not entitled to sovereign immunity from liability under the False

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Claims Act. The Court then turned to an analysis of whether a question of fact existed as to the allegation DMJM knowingly submitted a false claim to FEMA. The UTA building had been closed in 1991 in part due to declining enrollment and was left unoccupied for more than 2 years prior to the earthquake. The feasibility study commissioned by the University was issued on December 15, 1993. The next day, the CSUN Foundation voted against the proposals for reconstruction contained in the feasibility study. In addition, according to the former CSUN president, CSUN was considering demolishing the UTA at the time of the earthquake. However, the letter and memorandum sent by DMJM to FEMA stated that the UTA was closed in early 1993 for modications to meet the current building code requirements, and CSUN commissioned a feasibility study, which clearly indicates the Universitys intention to re-occupy the facility to its intended use. DMJM neglected to mention the Foundations decision not to act on the reconstruction proposals contained in the studies but instead stated that CSUN did not appropriate funds for the restoration of the facility based on the outcome of the study due to the occurrence of the Northridge earthquake.3 A FEMA representative remarked that had he been aware of all the facts, he would not have approved the funding request and would have found the UTA ineligible for FEMA funding. The Court found that this evidence could allow a fact nder to conclude DMJM made fraudulent representations to FEMA. Accordingly, there existed a question of material fact as to whether DMJM presented a false claim to FEMA.

Analysis and Conclusions

Procedurally speaking, the Courts opinion only permitted the FCA action to go forward against DMJM. The Court did not make any specic ndings as to DMJMs liability because at this stage the only issues before the Court were legal issues as to whether DMJM was immune from FCA liability and whether there existed a question of fact to be resolved by the trier of fact a jury regarding whether DMJM submitted a false claim. Nevertheless, this case raises two very important points. First, a construction management rm or other entity performing work for a state client will not be entitled to immunity from FCA liability by virtue of the fact that the company is doing work for the state. Because the federal government frequently provides funding for state projects, companies must be aware of the potential liability for submission of false claims on behalf of their clients to the federal government. Second, this case shows the importance of a thorough investigation of the facts prior to providing reports and recommendations to the federal government. A rm cannot merely rely on the written statements of another when it knows or should know additional information is available regarding representations being made to the federal government. What is more, liability need not arise out of a billing or an invoice but rather can lead to liability from almost any submission to the federal government that will induce the federal government to expend funds. Penalties for violation of the FCA, which can include damages calculated by trebling the amount of the money obtained from the government through the false claim as well as statutory nes, should provide rms with an incentive for thorough and complete investigations.

Evidence of Knowingly Submitting False Claim

The Court lastly addressed whether there was evidence that DMJM presented a false claim knowingly. Under the FCA, a defendant must be shown to have known that the claim was false, acted in deliberate ignorance of the truth or falsity of the claim, or acted in reckless disregard to falsity of the claim. Negligence and innocent mistake are insufcient to meet the intent requirement under the FCA. Neither DMJM employee responsible for preparing the letter and memorandum inquired about CSUNs intentions regarding the feasibility study. The drafter of the letter never discussed the study with anyone other than his superior. The superior acknowledged he had never even read the feasibility study and said that although he was aware the feasibility study had been discussed at the meeting where it was rejected, he made no effort to nd out what had happened at that meeting. The Court found that this evidence was sufcient to raise an issue of material fact that the DMJM employees acted knowingly or with reckless disregard for or deliberate ignorance of the true or falsity of the representations in the letter.

Endnotes
1

United States ex rel. Ali v Daniel, Mann, Johnson & Mendenhall, 355 F.3d 1140 9th Cir. 2004. Under the FCA, an individual relator may bring an action on behalf of the government a Qui tam action. The government then has the option of intervening and continuing with the case or declining intervention and allowing the relator to pursue the action on its own. These relators, who are usually insiders who uncovered or had knowledge of the false claims, are entitled to a portion of the amount recovered from the FCA defendant. This statement was erroneous because the Northridge earthquake occurred in January 1994 while the Foundation made its decision in December 1993.

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J. Prof. Issues Eng. Educ. Pract. 2004.130:210-211.