U.S. Supreme Court to Review 6th Circuit Case, will decide if False Claims Act covers Subcontractors

The following story was reported by FederalTimes.Com. Thanks to Jerry Walz at PubKLaw for the lead on this story.

By Elise Castelli

October 30, 2007

The [United States] Supreme Court has agreed to hear a case that will decide whether the government can collect penalties from subcontractors who commit fraud under a government contract.

General Motors, Rolls-Royce and two smaller companies want the Supreme Court to reverse a 6th U.S. Circuit Court of Appeals ruling that found they can be held financially responsible for allegedly misleading shipyards about the staff and materials used when they built parts for 50 Navy guided missile destroyers in the 1980s and 1990s.

The other two firms are General Tool Co. and Southern Ohio Fabricators, both of Cincinnati, Ohio. They were subcontractors to Allison Engine Co., a division of Rolls-Royce that GM once owned.

According to Supreme Court documents, the Navy paid for parts that were built by untrained staff using the wrong materials. Even though the firms were paid with tax dollars, the companies argue they’re not subject to the False Claims Act because they billed the shipyards, not the Navy, for the work.

The False Claims Act allows anyone to sue a company committing fraud against the government and collect damages. The government can join the case to recover damages for itself, allowing the whistleblower to keep some of what was recovered.

The two whistleblowers who brought the lawsuit 13 years ago worked for General Tool Co. The Justice Department later joined the case.

According to an attorney for one of the whistleblowers, James Helmer, the government paid more than $100 million for the faulty parts the subcontractors made. If the Supreme Court overturns the 6th Circuit decision in this case, United States ex rel. Sanders et al. v. Allison Engine Co., et al., the justices are “saying there is no remedy against subcontractors ... under the False Claims Act,” Helmer said. “That would be a terrible result because most work [on a government contract] is done by subcontractors.”

The companies’ arguments rest on a 2004 appellate court decision written by Chief Justice John Roberts before he was appointed to the Supreme Court. In the case, United States ex rel. Totten v. Bombardier Corp. known as the Totten Case, Roberts wrote that the whistleblower has to prove the subcontractor actually presented the false claim to the government.

In ruling on this false claims case, the 6th Circuit ruled Totten doesn’t apply here because the contractors were paid in government money, which the False Claims Act is meant to protect.

In a brief to the Supreme Court, the contractors argued upholding the 6th Circuit ruling would make subcontractors open to prosecution under the False Claims Act whenever they do business with a company, college or other institution that receives government funds.

The original article can be found here.