Where's the "Claim?"
The reach of the False Claims Act is long, but it does have its limits. It does not address fraud on private entities or individuals; there are other laws for that. Rather, the statute very specifically proscribes attempts to defraud the United States, with its longest-standing provision punishing the knowing submission to the government of a "false or fraudulent claim" for payment. Although the statute was enacted in 1863, it was not until 2009 that Congress actually defined the term "claim." As part of the Fraud Enforcement and Recovery Act of 2009 (FERA), the FCA was amended to define "claim" as "any request or demand . . . for money or property" that is (1) presented to an officer, employee, or agent of the United States, or (2) presented to a contractor, grantee, or other recipient of federal funds, if the funds were to be used for a government program or interest, and if a portion of the funds was provided or would be provided by the federal government.
Since FERA's enactment, courts have grappled with just what the term "claim" actually means. For example, in United States ex rel. Garg v. Covanta Holding Corp., 478 F. App'x 736 (2012), the Third Circuit held that a contractor's claims for payment made to a state municipal entity were not "claims" under the FCA despite that the federal government allowed the municipal entity to issue tax-exempt bonds that effectively provided the municipal entity a direct financial subsidy from the federal government. The court reasoned that "[t]he FCA requires more than fraud against anyone who happens to receive money from the federal government. Were that the case, the scope of the FCA would be enormous." Id. at 741. Instead, "the [FCA] only prohibits fraudulent claims that cause or would cause economic loss to the [federal] government." Id. (emphasis in original). Similarly, the Fifth Circuit in United States ex rel. Shupe v. Cisco Systems, Inc., 759 F.3d 379 (2014),1 held that claims on the E-Rate program are not "claims" under the FCA since the program is administered by the Universal Service Administrative Company (USAC), an independent, not-for-profit corporation designated by the FCC to administer funds contributed by telecommunications carriers. The court reasoned that while the FCC maintains regulatory supervision over the E-Rate program, that does not affect Congress' decision to externalize the cost of administering the program to USAC, a private entity, using funds provided by private telecommunications providers. In other words, in neither Garg nor Shupe was there a claim for federal money.
That brings us to the Second Circuit's decision late last year in United States ex rel. Kraus v. Wells Fargo & Co., 943 F.3d 588 (2019), where the court took an arguably broader (though not wholly inconsistent) view of what qualifies as a "claim." The court held that fraudulent loan applications submitted to privately-owned Federal Reserve Banks (FRBs) are claims under the FCA. The case arose out of the 2008 financial crisis when, according to the relators, Wells Fargo (then Wachovia) turned to the Federal Reserve for help, allegedly falsifying its solvency status to secure billions in loans from the Fed's emergency lending facilities. The Fed had delegated emergency lending responsibilities to the FRBs and Wells Fargo argued that the FRBs' status as private entities meant that funding requests submitted to the FRBs were not "claims" under the FCA. The court disagreed, finding that the money requested by the bank would ultimately be "provided" by the United States because, when an FRB issues a loan to a requesting bank, the bank "quite literally receive[s] money 'provided' by the [Fed], i.e. money made available and/or supplied by the United States." Id. at 604. The court also found that the FRBs were "agents" of the federal government (given Congress's ability to adjust or revoke the FRBs' authority to issue emergency loans). Id. at 592.
The Wells Fargo court cautioned, however, against reading its decision too broadly, noting that "the FCA was not designed to reach every kind of fraud practiced on the Government," including "frauds directed at private entities that only incidentally lead to payments with money provided by the government." Id. at 596. Thus, despite the Second Circuit's arguably broader reading of the term "claim," FCA defendants should continue pushing back on attempts by relators and the government to expand the FCA's scope beyond its intended limits.
* Samuel Shapiro contributed to this blog post. Mr. Shapiro is a graduate of Georgia State University College of Law and is employed at Arnold & Porter's Washington, DC office. Mr. Shapiro is admitted only in Georgia. He is not admitted to the practice of law in Washington, DC.
© Arnold & Porter Kaye Scholer LLP 2020 All Rights Reserved. This blog post is intended to be a general summary of the law and does not constitute legal advice. You should consult with counsel to determine applicable legal requirements in a specific fact situation.