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Federal Contractor Liable For Acts of Subcontractor under the False Claims Act

Last month, we wrote about the Supreme Court decision to expand whistleblower protection under the Sarbanes Oxley-Act to reach private employers, namely, contractors and subcontractors of publically traded companies.

Confirming the reach of another federal whistleblower act, the U.S. Court of Appeals for the Sixth Circuit recently affirmed a decision that a federal contractor violated the federal False Claims Actwhen it falsely certified that one of its subcontractors had paid its employees “prevailing wages” in accordance with the Davis-Bacon Act. The Sixth Circuit opinion is notable for the conclusion that it reached (i.e., that a prime contractor violates the False Claims Act by overlooking its subcontractors violation of the Davis-Bacon Act) and also for its thoughtful analysis of the interplay between those two interesting and complex federal statutes.

Background on the False Claims Act and Davis-Bacon Act

In 1863, during the Civil War, Congress enacted the False Claims Act (FCA) due to concerns that suppliers of goods to the Union Army were defrauding the Army. The FCA provided that any person who knowingly submitted false claims to the government was liable for double the government’s damages, plus a penalty of $2,000 for each false claim. Since its enactment, the FCA has been amended several times. In 1986, there were significant changes to the FCA, including increasing damages from double damages to treble damages and raising statutory penalties from $2,000 to a range of between $5,000 and $10,000 per violation. The FCA has been further amended three times since 1986. Over the life of the statute, federal courts have interpreted it on hundreds of occasions (with sometimes conflicting interpretations).

Less well known is the Davis-Bacon Act. In a nutshell, the Davis-Bacon Act of 1931 is a federal law that requires contractors to pay prevailing wages on public works projects.  All federal government construction contracts (and most contracts for federally assisted construction projects) above a certain dollar threshold must include provisions that require contractors to pay on-site construction workers no less than the “locally prevailing wages and benefits” paid on similar construction projects.  The Department of Labor calculates these prevailing wages and benefits on a regular basis, and the specific rate is then included in the contract itself.

Davis-Bacon is an important priority of the United States government. Payments to construction companies doing the government’s work are expressly contingent upon the company certifying, on a weekly basis, its compliance with the Davis-Bacon Act. Contractors and subcontractors must also furnish weekly payroll certifications documenting the wages paid to each employee for that week.  And if the subcontractors do not submit independent certifications, liability can flow upward to the prime contractor.   This is where the recent Sixth Circuit case comes in.

In United States v. Circle C Construction, L.L.C., 2012 U.S. App. LEXIS 20433 (6th Cir. 2012), the United States government brought an FCA claim against Circle C Construction Company, a general contractor for the U.S. Army. Circle C Construction contracted with the Army to perform construction work on buildings at Fort Campbell in Tennessee. Under Davis-Bacon, Circle C’s contract required it to pay prevailing wages. The contract also required Circle C to submit certified payroll records verifying the payment of prevailing wages. Circle C subcontracted with Phase Tech to perform electrical work on the project.  A Department of Labor investigation revealed that Phase Tech failed to pay prevailing wages.  Circle C’s payroll certifications to the Army, however, verified that all workers (including Phase Tech’s workers) had been paid prevailing wages.

The U.S. claimed that Circle C violated the FCA by submitting applications for payment which falsely certified that all of its subcontractors paid prevailing wages in accordance with the Davis-Bacon Act.  Circle C claimed that its failure to submit accurate certifications for Phase Tech did not evidence an intent to defraud the government but, rather, merely reflected sloppiness on Circle C’s part.

The Court found that it didn’t matter whether Circle C intended to defraud the government by submitting the false wage verifications. Invoking the “implied certification” theory of liability, the Court found that—regardless of Circle C’s intent—it violated the FCA by submitting the false wage certifications, since the Davis-Bacon Act affirmatively required it to police its subcontractors’ payment practices. In other words, the Court found Circle C liable under the FCA for its subcontractor’s failure to comply with Davis-Bacon and its own false certification of its subcontractor’s compliance with Davis-Bacon.   The Court awarded the government over $500,000 in damages, which it then trebled (tripled) under the FCA, for a total damage award in excess of $1.5 million.

Both False Claims Act and Davis-Bacon claims involve hosts of procedural hurdles to overcome. But as confirmed in Circle C, primary contractors may be liable under the FCA for their subcontractors’ non-compliance with Davis-Bacon, and tremendous liability can flow to the contractor under Davis-Bacon through the False Claims Act. Fried & Bonder is currently reviewing similar cases against contractors for the failures of their subcontractors to pay prevailing wages.

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