The New Minnesota False Claims Act

The New Minnesota False Claims Act

July 30, 2009

By Dean B. Thomson

The Federal Civil False Claims Act allows the federal government to pursue fines and treble damages against contractors who assert “false” claims. Fortunately, the scope of the Federal Act was limited and applied to only federal (or federally funded) projects in Minnesota. But in the 2009 legislative session, hidden within an omnibus spending bill, the Minnesota Legislature passed a Minnesota False Claims Act (MnFCA), which applies to all Minnesota state or municipally-funded projects.[1] The MnFCA is similar to the federal False Claims Act, and carries identical penalties. It is crucial that Minnesota contractors be aware of the MnFCA, as past practices may now expose a contractor to MnFCA civil penalties.

This paper will first review basic provisions of the Act, then highlight its favorable and unfavorable terms, and conclude with suggestions on how to avoid being the subject of a false claim investigation.

 

Basic provisions of the Act

The purpose of the Act is to penalize anyone who “knowingly” attempts to defraud the government by submitting a false claim to the government for payment. A “claim” is any type of payment request, including a normal pay application, or any document that might cause the government to request less payment than the government is entitled to. In general, the law levies penalties on persons who “knowingly” cause the government to pay more money than it should be paying – or, conversely, who “knowingly” pay the government less or cause the government to request less than the government is actually due.

While “knowingly” sounds like it is aimed at deliberate fraud, in fact, the definition of “knowingly” is broader than one might imagine. The definition of “knowingly” given in the MnFCA is essentially identical to that of the federal FCA:

Subd. 3. Knowing and knowingly. “Knowing” and “knowingly” mean that a person, with respect to information:

(1) has actual knowledge of the information;

(2) acts in deliberate ignorance of the truth or falsity of the information; or

(3) acts in reckless disregard of the truth or falsity of the information.

No proof of specific intent to defraud is required, but in no case is a person who acts merely negligently, inadvertently, or mistakenly with respect to information deemed to have acted knowingly.[2]

Therefore, “recklessly” submitting any document the state or local government requires on a project that arguably affects payment, no matter how peripheral, can be grounds for FCA sanctions. For example, contractors are often asked to certify compliance with environmental, immigration, or DBE programs as part of a pay application. If an incorrect certification can affect payment, the government can claim it is a false “claim” and seek FCA remedies. Furthermore, while “mistake” is explicitly exempted from liability, the burden will inevitably be on the contractor to show that any false information the contractor submitted was a forgivable “mistake” and not a “reckless” error justifying sanctions.

“False” is also not necessarily an objective standard. For instance, if a contractor certifies that it has made “good faith efforts” to meet a Disadvantaged Business Enterprise goal on a Project, and the government later believes to the contrary, the government can allege the contractor’s certification to be “false” and seek to recover treble damages.

Finally, just as in the Federal FCA, under the MnFCA, the government need only prove its case by a preponderance of the evidence. This means the government must only prove that it is “more likely than not” that the contractor “knowingly” violated the MnFCA in order to establish contractor liability.

Penalties for violation of the MnFCA

As in the federal FCA, violations of the MnFCA are punishable by (1) a civil penalty of not less than $5,500 and not more than $11,000 per claim, plus (2) triple the government’s damages.Because the federal and Minnesota Acts in regard to penalties are identical, we can assume the state and municipalities will seek to levy similar damage claims. In the past, the federal government has at various times attempted to claim as actual damages the difference in market value between what was received and what should have been received; the value of the specific fraudulent claims; or even the entire contract amount.[3] Again, whatever actual damages the government proves are tripled. The person violating the MnFCA must also pay the costs the government occurs in bringing suit against the violator.[4] 

Like the federal FCA, the MnFCA contains a “whistleblower” or “qui tam” provision.[5] This allows private individuals to bring MnFCA claims on behalf of the government.If an individual brings a suit pursuant to the qui tam provision, and succeeds in the suit, the individual receives some portion of the money recovered from the false claimant.[6] The MnFCA and federal FCA qui tam provisions are virtually identical in substance, though there are a few differences (some discussed below).[7]

In order for a private individual to commence suit under the MnFCA, the individual must submit his or her complaint to the court and the appropriate government prosecuting attorney.[8] The prosecuting attorney then has 60 days in which to decide whether to “intervene” in the action.[9] If the prosecuting attorney decides to intervene, the prosecuting attorney assumes primary responsibility for prosecuting the action, though the qui tam plaintiff remains a party.[10] After the 60 days, the complaint is served on the defendant.[11] If the prosecuting attorney decides not to intervene, the qui tamplaintiff may continue the action on his or her own.[12]

Should the qui tam plaintiff be an employee of the accused, the accused may not fire or otherwise punish the qui tamplaintiff for bringing the case.[13] Should the accused take any such prohibited action against the qui tam plaintiff, the qui tam plaintiff is entitled to reinstatement, twice their lost compensation, interest, and other special damages.[14]

Statute of limitations/repose

The MnFCA and the federal FCA have identical statute of limitations periods: specifically, the qui tam relator or government must bring their claim within (1) six years of the fraudulent activity or (2) within three years of discovery of the fraudulent activity, whichever is longer, but (3) in no event more than ten years after the fraudulent activity.[15] Additionally, in practice, the government will pressure alleged violators to voluntarily toll (suspend) the statute of limitations while the government takes time to investigate and decide what it wants to do. Generally, prospective defendants have little incentive not to accede to the government’s demands in the hope that the government will decide not to pursue a suit.

“Cooperation Discount”

The MnFCA, like the federal FCA, provides that if the person committing a violation under the FCA fully cooperates with a government officer who is charged with investigation of the violation (e.g., furnishes the investigator with all relevant documents), the person’s penalty is reduced from treble the government’s damages to double the government’s damages.[16] This reduction in damages is only available if the violating party cooperates without having any actual knowledge of the government investigation and before any court or administrative action is commenced.[17]

 

Some Bright Spots

The MnFCA contains a few provisions that may provide some relief to contractors.

Safe Harbor provision

The MnFCA provides a safe harbor provision, which is unlike anything in the federal FCA.[18] The provision states that before bringing suit, the “original source” (i.e. the qui tam plaintiff or other person who is the source of information of the fraud that was not previously known to the government or disclosed in the media) must inform the defendant business of its purported fraud. The business then has 45 days to correct its fraud (e.g. pay back the fraudulently obtained money). The safe harbor provision is not available if the defendant was deliberately attempting to defraud the government (as opposed to recklessly doing so).

It is difficult to imagine how this safe harbor would work in regard to activities that cannot be corrected. For example, if DBE participation was claimed during the project and the project is now complete, it will be impossible to correct the alleged false claim after-the-fact.

Limitation on contractor liability for actions of employees

The MnFCA provides that an employer is not responsible for fraudulent acts of “nonmanagerial employees” unless the employer “had knowledge of the act, ratified the act, or was reckless in the hiring or supervision of the employee.”[19] It is, accordingly, tacitly assumed that the employer is responsible for the fraudulent acts of its managers.Nevertheless, the MnFCA is more lenient in this aspect than the federal law, which has no provision exempting the employer from any vicarious liability for the acts of its employees.

Definition of “claim” arguably narrower

The federal FCA levies a penalty on those who in some way submit a fraudulent “claim.”In the federal FCA, the definition of “claim” states:

“claim” includes any request or demand, * * * for money or property which is made to a contractor, grantee, or other recipient if the United States Government provides any portion of the money or property which is requested or demanded, or if the Government will reimburse such contractor, grantee, or other recipient for any portion of the money or property which is requested or demanded.[20]

By contrast, the MnFCA defines a claim as follows:

“Claim” includes a request or demand, * * * for money or property that is made by a contractor, grantee, or other recipient to the state or a political subdivision if the state or the political subdivision has provided or will provide a portion of the money or property that is requested or demanded, or if the state or the political subdivision will reimburse the contractor, grantee, or other recipient for any portion of the money or property that is requested or demanded.[21]

This definition potentially limits application of the law to only situations wherein a claim for payment is made directly to the state government.It is questionable, therefore, whether a subcontractor that does not directly make a claim to the state or political subdivision can be subject to MnFCA liability.

Reporting provisions

The MnFCA contains a provision requiring the Minnesota Attorney General to report every year to the legislature regarding the profitability of the statute (the net proceeds received by the state via the MnFCA, and the time spent by the Attorney General’s office in reviewing/prosecuting the claims).[22] This could provide an avenue for yearly petitions to the legislature regarding any enforcement excesses and problems with the MnFCA.

 

The Black Holes Surrounding the Bright Spots

There are several ways in which the MnFCA is significantly worse than the federal FCA:

No attorney’s fees or costs for defendants

While the MnFCA provides for the defendant to pay the state’s costs and attorney’s fees in the event that the defendant loses the lawsuit, the statute explicitly provides that should the government lose the case, the government does not have to pay the defendant’s costs and fees – arguably, under any circumstances.[23] Normally, should a party bring a frivolous lawsuit, that party may be subject to sanctions under various statutes and court rules.[24] The unique language in this statute could preempt the general rule requiring a party who brings a frivolous claim to pay the other side’s attorney’s fees – leaving the state or municipal government in the position of being able to assert baseless suits against contractors without fear of penalty.In contrast, the federal FCA allows defendants to collect attorney’s fees when the federal government’s position was “not substantially justified.”[25]

No penalties for bad actor qui tam plaintiffs

While the federal FCA contains a provision allowing the court to reduce or remove completely a qui tam plaintiff’s compensation if the qui tam plaintiff was the actual cause of the FCA violation, there is no such provision in the MnFCA.[26] Arguably, therefore, under the MnFCA, a defendant’s employee could help develop a false claim (e.g. by participating in false documentation), send the false claim in to the Minnesota government on behalf of the defendant, and turn around and sue the defendant as a qui tam plaintiff for the false claim the employee helped create! 

No need for “diligence”

The federal FCA specifies that the Attorney General must “diligently” investigate claims.[27] The word “diligently” is left out of the MnFCA.[28] This implies that the Minnesota Attorney General has no obligation to investigate in a timely manner, which could lead to claims well past the time the corporation might have corrected the problems with prompt notice.

 

How to Avoid “False” Claim Liability

While fighting fraud appears to be a good idea in theory, the MnFCA creates a substantial risk of government abuse. For instance, the federal government has often counterclaimed with false claims charges when a contractor brings a case against the government for nonpayment of a claim under a contract. The threat alone of such counterclaims can often deter contractors from making valid claims for the money they are owed. Furthermore, contractors cannot expect measured responses from small city councils and school boards, which might assert MnFCA charges with minimal cause simply because they are angry over the claim.Additionally, losing an MnFCA claim could result in debarment (as the contractor is held to have defrauded the government)[29] in the way that a losing a simple breach of contract claim would not. There are, in short, significant incentives for the state, municipal agencies, and qui tam plaintiffs under this legislation to bring MnFCA claims irrespective of whether they are justified.

In order to protect against MnFCA liability, contractors should carefully prepare and review all payment claims and any other submissions the contractor must make to the government for a project. Additionally, contractors should consider implementing a comprehensive compliance program to ensure that they are in compliance with all Minnesota and federal laws and regulations that relate to “claims” for payment.Noncompliance with a law or regulation could arguably transform the contractor’s entire set of pay applications into “false claims” as state or municipal owners could argue (and the federal government has argued) that payment of the contractor was premised on the contractor’s contractual agreement to comply with all applicable laws and regulations.For suggestions on how to create such a compliance program, see our prior October, 2008 Briefing Paper, New Federal Regulations Require Contractors to Have Compliance Programs[30]. Notably, the Act is not effective until July 1, 2010, giving the industry some time to implement compliance programs.

Finally, with the penalties for false claims now so severe, it would be prudent to review any claim for a time extension or additional compensation with counsel to make sure it is properly prepared and founded in law and fact. While the MnFCA discourages careless assertions of entitlement, it need not affect legitimate, well supported claims.



[1] SF 2082, HF 1781, to be codified as Minn. Stat. § 15C.02(a)(1) (effective date July 1, 2010).

[2] Minn. Stat. § 15C.01, subd. 3.While the federal FCA does not explicitly contain language excluding mistake or negligence from the definition of “knowingly,” courts have stated that innocent mistakes and negligence do not constitute “knowing” false claims under the federal FCA.See, e.g., United States ex rel. Durcholz v. FKW Inc., 997 F.Supp 1159, (S.D. Ind. 1998) affirmed 189 F.3d 542 (innocent mistakes or negligence not actionable, claim must be a lie).

[3] See, e.g., United States v. TDC Management Corporation, Inc., 288 F.3d 421, 428 (D.C. Cir. 2002), Ab-Tech, Inc. v. United States, 31 Fed. Cl. 429 (1994), United States v. Rogan, 517 F.3d 449 (7th Cir. 2008); United States v. Mackby, 339 F.3d 1013 (9th Cir. 2003); United States ex rel. Longhi, 530 F.Supp.2d at 898-900 (S.D.Tex. 2008); United States ex rel. Stebner v. Stewart & Stevenson, 305 F.Supp.2d 694, 701 (S.D.Tex. 2004).

[4] Minn. Stat. § 15C.02(c).

[5] Minn. Stat. § 15C.06-13.

[6] Minn. Stat. § 15C.13.

[7] Minn. Stat. § 15C.06-13, 31 U.S.C. § 3730

[8] Minn. Stat. § 15C.06(d), (e).

[9] Minn. Stat. § 15C.06.

[10] Minn. Stat. § 15C.08.

[11] Minn. Stat. § 15C.06, .07.

[12] Minn. Stat. § 15C.08(a).

[13] Minn. Stat. § 15C.14.

[14] Id.

[15] 31 U.S.C. § 3731(b), Minn. Stat. § 15C.11(a).

[16] Minn. Stat. § 15C.02(b).

[17] Minn. Stat. § 15C.02(b)(3).This provision in the MnFCA appears to be something of an artifact from the federal FCA, as it is arguably at least partially obviated by the safe harbor provision in Minn. Stat. § 15C.(f) (discussed below).

[18] Minn. Stat. § 15C.02(f).

[19] Minn. Stat. § 15C.02(e).

[20] 31 U.S.C. § 3729(c) (emphasis added).

[21] Minn. Stat. §15C.01, subd.2.

[22] Minn. Stat. § 15C.16.

[23] Minn. Stat. § 15C.12 (“The state or a political subdivision is not liable for expenses, attorney fees, or other costs incurred by a person in bringing or defending an action under this chapter.”)

[24] See Minn. R. Civ. P. 11.

[25] 31 U.S.C. § 3730(g) (referencing 28 U.S.C. § 2412(d)).

[26] Cf Minn. Stat. § 15C.13 and 31 U.S.C. § 3730(d)(3).

[27] 31 U.S.C. § 3730(a).

[28] Minn. Stat. § 15C.04, subd. 1.

[29] See Minn. Stat. § 15C.06(c) (allowing other administrative remedies).

[30] See www.fwhtlaw.com website under Briefing Papers.

This discussion is generalized in nature and should not be considered a substitute for professional advice. © FWH&T

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