Federal Government Expands Use Of False Claims Act To Export Control Violations By Federal Subcontractor

Sunday, April 3, 2011 - 00:00

A recent case involving Rocky Mountain Instrument Company (RMI), a federal government contractor, marks the first time that the government has used the False Claims Act (FCA) to punish a violation of export control laws.Moreover, the case illustrates how the Fraud Enforcement and Recovery Act of 2009 has expanded the risk of liability under the FCA for subcontractors and vendors not doing business directly with the government.

The FCA is the U.S. government's primary tool for combating fraud involving government contracts and programs. Among its novel features, the law provides that every violation generates liability for a civil penalty of between $5,000 and $10,000, plus three times the amount of damages the government sustains because of the fraudulent act.1The FCA also allows whistleblowers (called "relators") to bring claims themselves and recover up to thirty percent of the proceeds of the judgment or settlement.2

From 2005 through 2007, while working on a Defense Department project, RMI exported technical drawings to Turkey, South Korea, China, and Russia in order to facilitate the manufacture of optical and laser products. Because the drawings were designated as defense articles on the U.S. Munitions List, their export required a license or written authorization from the Department of State. RMI failed to obtain the necessary export licenses, and the U.S. Attorney's Office for the District of Colorado charged it with violating the Arms Export Control Act (AECA) and the International Traffic in Arms Regulations (ITAR).3On June 22, 2010, RMI pled guilty to the violations and agreed to a $1 million criminal forfeiture and a five-year probationary term.4

Several months later, the Department of Justice announced that it also had reached a civil settlement with RMI for payment of an additional $1 million in connection with alleged violations of the FCA.5This appears to be the first time that the FCA has been used as a basis for obtaining damages allegedly caused by violations of export control laws.

Expanded FCA Liability For Exporters

In this case, the Justice Department alleged that RMI's export violations constituted fraud under the FCA. The Government claimed that RMI's failure to obtain the export licenses violated the terms and conditions of its subcontract. By subsequently seeking payment from the prime contractor, who in turn sought payment from the U.S. government, RMI was causing the submission of a false claim by the prime contractor.

Prior to this case, the FCA had never been used to punish federal contractors for violations of the AECA, the ITAR, or any other export control law. Announcing the settlement with RMI, Tony West, the assistant attorney general for the Civil Division of the Department of Justice, emphasized the Department's commitment to "vigorous enforcement of our export control laws," and the U.S. attorney for the District of Colorado warned that "[c]ompanies involved in exporting sensitive technology should take note that if they violate the law there will be financial consequences."6

Taken to its extreme, this precedent could be used to justify FCA claims for any violation by a federal contractor. For example, many government procurements include standard clauses that require compliance with a wide range of federal laws and regulations, including the Buy American Act, the Fair Labor Standards Act, Equal Opportunity and Affirmative Action policies, and various environmental laws and regulations. Under the RMI line of thinking, a federal contractor violating these provisions (or many others), and then falsely certifying compliance, could face stiff penalties under the FCA.

Expanded FCA Liability For Subcontractors Under FERA

The case against RMI also demonstrates how the Fraud Enforcement and Recovery Act of 2009 (FERA) has expanded the risk of liability under the FCA for lower tier subcontractors and vendors not doing business directly with the government. Until 2009, the FCA created liability, inter alia , for any person who-

(1) knowingly presents, or causes to be presented, to an officer or employee of the United States Government or a member of the Armed Forces of the United States a false or fraudulent claim for payment or approval;

(2) knowingly makes, uses, or causes to be made or used, a false record or statement to get a false or fraudulent claim paid or approved by the Government;

(3) conspires to defraud the Government by getting a false or fraudulent claim allowed or paid; 7

These provisions were interpreted to be limited to those who made a claim directly to an officer or employee of the U.S. government under (1)8or who specifically intended to have the government itself pay or approve the false claim under (2) or (3).9In passing FERA in 2009, Congress modified the language to include any situation where a subcontractor submits a fraudulent claim to other governmental contractors, grantees, or recipients, provided that it causes the government to pay a false or fraudulent claim.10

Conclusion

Because export control regulations cover many items beyond just "weapons," compliance can be complex. The application of the False Claims Act to violations of export control laws significantly raises the stakes for entities doing business with the government, either directly or as subcontractors.

1 See 31 U.S.C. § 3729(a) (2006). See also Fraud Enforcement and Recovery Act of 2009, Pub. L. No. 111-21, 123 Stat. 1617 at § 4(a)(1)(a)(1) (2009).

2 See 31 U.S.C. § 3730(d) (2006). This provision was not amended by FERA.

3 Rocky Mountain Instrument Company Pleads Guilty and is Sentenced for Illegally Exporting Defense Articles Without a License to Turkey, South Korea, China and Russia, Press Release, Dep't of Justice (June 22, 2010), available at http://www.justice. gov/usao/co/press_releases/2010/ June10/ 6_22_10.html ; see also Information at 1, United States v. Rocky Mountain Instrument Co., 10-cr-00139-WYD-01 (D. Colo. 2010).

4 United States v. Rocky Mountain Instrument Company, 10-cr-00139WYD-01 (D. Colo. 2010); see also Rocky Mountain Instrument to Pay U.S. $1 Million to Resolve False Claims Act Allegations, Press Release, Dep't of Justice (Oct. 29, 2010), available at http://www.justice.gov/opa/pr/2010/ October/10-civ-1233.html .

5 Rocky Mountain Instrument to Pay U.S. $1 Million to Resolve False Claims Act Allegations, Press Release, Dep't of Justice (Oct. 29, 2010), available at http://www.justice.gov/opa/pr/2010/ October/10-civ-1233.html ; see also In re Rocky Mountain Instrument Co. , No. 09-22368-HRT (Bankr. D. Colo. Oct. 15, 2010) (order allowing claim no. 40 pursuant to settlement agreement).

6 Rocky Mountain Instrument to Pay U.S. $1 Million to Resolve False Claims Act Allegations, Press Release, Dep't of Justice (Oct. 29, 2010), available at http://www.justice.gov/opa/pr/2010/ October/10-civ-1233.html .

731 U.S.C. § 3729(a)(1)-(3) (2006).

8 U.S. ex rel. Totten v. Bombardier Corp., 380 F.3d 488 (D.C.Cir. 2004) (holding that in order for liability to exist under § 3729(a)(1), a fraudulent claim must be presented for payment or approval to an officer or employee of the United States).

9 Allison Engine Co. v. U.S. ex rel. Sanders, 128 S. Ct. 2123 (2008) (interpreting the language "to get" and "getting" as requiring that the claimant intend to defraud the government and not merely a contractor or grantee) ("'To get' denotes purpose, and thus a person must have the purpose of getting a false or fraudulent claim 'paid or approved by the Government' in order to be liable under § 3729(a) (2). [A] defendant must intend that the Government itself pay the claim. Our interpretation of [the language of § 3729(a)(3)] is similar to our interpretation of the language of § 3729(a)(2). Under § 3729(a)(3), it is not enough for a plaintiff to show that the alleged conspirators agreed upon a fraud scheme that had the effect of causing a private entity to make payments using money obtained from the Government. Instead, it must be shown that the conspirators intended 'to defraud the Government.'").

10Compare 31 U.S.C. § 3729(a)(1)-(3) (2006) with Fraud Enforcement and Recovery Act of 2009, Pub. L. No.111-21, 123 Stat. 1617 at § 4(a)(1)(a) (1)(A)-(C) (2009) (providing liability for any person who, among other things, "(A) knowingly presents, or causes to be presented a false or fraudulent claim for payment or approval; (B) knowingly makes, uses, or causes to be made or used, a false record or statement material to a false or fraudulent claim;" or "(C) conspires to commit a violation .").

Steven A. Tyrrell serves as Co-chair of Weil's White Collar Defense & Investigations Group. His practice focuses on white collar criminal defense, regulatory enforcement matters and internal investigations. Charles E. (Chip) Roh, Litigation Partner, concentrates his practice in international trade and international investigation matters. He represents and advises U.S. and foreign businesses, associations and governments in international dispute settlement proceedings, international arbitrations and negotiations. He has served as party counsel in four investor-state treaty arbitrations and more than 25 dispute settlement proceedings under the WTO and GATT, and has been outside counsel to businesses, associations and governments in bilateral regional and WTO negotiations. The authors wish to thank Timothy Welch, a Litigation Associate, for his assistance in writing this article. All attorneys serve in Weil Gotshal's Washington, DC office.

Please email the authors at steven.tyrrell@weil.com or chip.roh@weil.com with questions about this article.