(l-r) Partners Brandt Leibe and Grant Nichols, and associate Oliver Peter Thoma, of King & Spalding.

As the COVID-19 pandemic continues to ravage our communities and our economy on a scale that is difficult to quantify, many Texas companies—from energy to health care, tech to life sciences—have had to take the lifeline that was extended to them by the federal government. Indeed, over 361,000 Texas companies have been approved for federal aid to the tune of $40 billion these past few months. This money, of course, comes with strings attached, but some of those strings are more obvious than others. While nearly all companies are doing what they can to avoid committing fraud or making misstatements in documents submitted to the government, recipients of federal dollars may not fully appreciate the numerous landmines that need to be navigated after they have received government funds.

Any number of missteps—including at the next stage of making certifications as companies apply for loan forgiveness—could lead to run-ins with law enforcement, and chief among them is the risk that companies run afoul of the False Claims Act. As the calendar turns to the second half of the year and applications to programs like PPP draw to a close, now is a good time for companies that received support from the government to consider what comes next to minimize the chances that they will find themselves jumping out of the frying pan of dire financial straits and into the False Claims Act fire.

The following article provides companies with a background on the False Claims Act, describes how the government programs in response to COVID-19 can create False Claims Act risk for companies, and closes with some thoughts on what companies can do now to avoid that risk.

Background on the False Claims Act

The False Claims Act originated during the Civil War when unscrupulous contractors supplied the Union army with rancid rations, lame horses, and faulty rifles and munitions. President Abraham Lincoln referred to such fraudsters as "worse than traitors."

Times of national crisis since the Civil War—whether war, natural disaster, economic calamity or public health emergency—have often brought with them increased False Claims Act litigation, whether brought by the Department of Justice (DOJ) and private qui tam relators.

In the wake of the Great Recession, Congress passed the Fraud Enforcement and Recovery Act of 2009 (FERA), which expanded the reach of the FCA to encompass recipients of federal funds regardless of whether false claims were submitted directly to the government—thus, any recipient of federal funds (e.g., federal stimulus or bailout investment programs, or federally funded or insured loans) could be subject to FCA liability. This potential exposure is not limited to the information provided during the application process. For example, companies seeking forgiveness of the loans provided may face False Claims Act exposure based on statements and certifications required as part of the process of seeking loan forgiveness.

Although health care institutions and life sciences companies are common targets of FCA litigation and investigations (e.g., Medicare or Medicaid billing fraud and kickbacks), the expansion in FCA liability under FERA and availability of treble damages and civil penalties have expanded litigation into nearly every industry that comes into contact with government funding. In a January 2020 press release, the DOJ announced over $3 billion in FCA settlements and judgments for the 2019 fiscal year, and a grand total of over $62 billion since Congress expanded the whistleblower incentives to bring qui tam actions in 1986. FCA litigation can be extremely "profitable" for the federal government and the qui tam relators that bring claims.

Same Song, Different Verse: Liability Arising Out of COVID-19

In response to the COVID-19 pandemic, Congress passed the Coronavirus Aid, Relief and Economic Security (CARES) Act, which authorized $2.2 trillion to, in part, help companies and individuals mitigate the financial catastrophe induced by COVID-19. The initial $350 billion funding for the Paycheck Protection Program (PPP) was exhausted in approximately a week, and an additional $250 billion in funding for the PPP was signed into law April 24, 2020.

On June 5, the Paycheck Protection Program Flexibility Act of 2020 was signed into law and the U.S. Small Business Administration issued new rules thereafter collectively revising the criteria to obtain loan forgiveness and, among other provisions, increased the non-payroll portion of a forgivable loan from 25% to 40% and extended the period of time businesses have to rehire employees through Dec. 31, 2020.

The dramatic influx of federal funds through the CARES Act—which is already three times the total federal stimulus in response to the Great Recession—is likely to result in an increase in federal law enforcement activity. By way of further historical example, the DOJ prosecuted the misuse of federal funds doled out as part of the 2008 Troubled Asset Relief Program (TARP), and the Office of the Special Inspector General for the Troubled Asset Relief Program (or SIGTARP) referred criminal charges against over 430 individuals, 380 of which resulted in successful prosecutions, in addition to recovering over $11 billion in civil penalties.

Separate and apart from False Claims Act, the CARES Act has three oversight bodies—with tens of millions of dollars of allocated funding—responsible for overseeing CARES Act funding: the Pandemic Response Accountability Committee, made up of inspectors general from at least nine federal agencies; the Special Inspector General for Pandemic Recovery, a new office within the Department of the Treasury; and a Congressional Oversight Committee overseeing economic stability efforts by the Treasury Department and the Federal Reserve Board.

With so many enforcement and regulatory eyes on how CARES Act dollars are being distributed, used and forgiven, Texas companies hoping to avoid the potential civil and criminal liability or congressional oversight associated with the CARES Act or COVID-19 relief efforts should evaluate their compliance programs related to these programs.

Instituting Sound Practices to Avoid FCA Liability

As Mark Twain is often credited with saying: "History doesn't repeat itself, but it often rhymes." With that observation in mind, Texas companies can and should draw on the experience from companies that survived past crises to help mitigate or prevent enforcement action.

Many lawyers and financial institutions encouraged PPP borrowers or recipients of other relief to open separate accounts to track the spending of these relief dollars. That advice was more than just semantics. Whether the federal aid received was kept in a separate account or not, companies must be prepared to retrace how the money they received was spent. This is particularly true for companies that anticipate seeking loan forgiveness, as only certain expenditures will qualify. Since loan forgiveness will effectively amount to a reimbursement claim to the federal government, all reasonable measures must be taken to ensure that such claims accurately reflect the amounts used.

Reasonable measures include lining up and organizing supporting documentation for qualifying expenses, particularly those that may not appear to qualify for loan forgiveness on their face. For example, information about how employees may have been compensated, at what levels, where certain employees reside (inside or outside the U.S.), when certain costs were incurred, and more will all bear on whether expenses qualify for loan forgiveness. These are facts that companies will want available to prove the claim for loan forgiveness if that date comes. Carefully collecting and organizing this documentation in real time will save headaches later.

Recent remarks by the acting head of the DOJ's Civil Division, Ethan Davis, show the importance of preparing for the federal government's laser focus on pursuing False Claims Act enforcement related to COVID-19 relief funds: "In a time when the government is injecting vast amounts of federal funds into the U.S. economy, vigorous FCA enforcement is more important than ever to ensure that taxpayer dollars are spent as intended."

Texas companies hoping to avoid the unwelcome attention of DOJ, Congress and various inspectors general should do all they can to prepare for the day they may have to explain the decisions they made during this critical time. An ounce of prevention is worth a pound of cure. Counsel with experience handling internal and government investigations and advising clients on how to avoid them can make the difference in avoiding future scrutiny by evaluating current practices and developing a game plan for correcting course.

 

Brandt Leibe is a partner at King & Spalding, where he specializes in white-collar criminal defense, government investigations and related matters. A partner in the special matters and investigations practice, Leibe represents clients in investigations and litigation. He can be reached at [email protected].

Grant Nichols is a partner at the firm, where he focuses on government investigations, independent investigations, and complex white-collar criminal defense matters. A partner in the special matters and investigations practice, Nichols defends individuals and multinational companies in a variety of their most sensitive matters, including internal investigations and investigations by federal and state government authorities. He can be reached at [email protected].

Oliver Peter Thoma is an associate at the firm, where he serves in the firm's trial and global disputes practice, representing companies in the life sciences, health care, and energy sectors in high-profile, complex and mass tort litigation. Thoma understands the importance of seeing litigation strategy through the lens of a company's overall business strategy, which he has learned through his leadership roles within national counsel teams for high-profile, complex and mass tort litigation. He can be reached at [email protected].