Procurement Fraud and the False Claims Act: Defending the Government Contractor

The False Claims Act has become the dominant enforcement tool in the procurement fraud landscape, and the consequences for government contractors facing FCA exposure are substantial. Treble damages. Per-claim civil penalties that compound across the universe of submitted invoices. Suspension and debarment proceedings that can foreclose future federal contracting. Reputational damage that affects commercial customers as well as federal ones. Individual exposure for executives whose conduct is characterized as personally implicated in the alleged fraud. The defense of these matters requires substantive expertise that crosses procurement law, federal litigation practice, and the particular doctrines that the FCA has accumulated over decades of qui tam litigation.

I have defended government contractors in FCA matters at multiple stages — pre-intervention investigations, post-intervention litigation, suspension and debarment proceedings, and the parallel commercial litigation that often follows public allegations of procurement fraud. The defenses available in these cases are real and substantial, but they are technical, fact-intensive, and dependent on the particular structure of the contracts at issue and the conduct alleged. Generalist defense counsel without experience in this area often miss the substantive defenses that the FCA case law makes available, and the cost of those misses is borne by clients who could have prevailed had the defenses been developed properly.

The Universal Health Services Materiality Standard

The Supreme Court’s 2016 decision in Universal Health Services v. United States ex rel. Escobar fundamentally changed the materiality analysis in implied false certification cases. Before Escobar, plaintiffs and the government argued that any regulatory violation incorporated by reference into a federal contract or a federal benefit program could support FCA liability if the violation was not disclosed in the claim for payment. After Escobar, the materiality requirement became a substantive doctrine with teeth.

Escobar established that materiality is a demanding standard. A violation is not material merely because the contract or regulation labels it material. A violation is not material merely because the government would have had the option to refuse payment had it known about it. A violation is material when the government’s actual payment decisions would have been different had the violation been disclosed, evaluated against the government’s pattern of conduct in similar circumstances.

The defense implications of Escobar are substantial. The defendant who can establish that the government continued to pay claims despite knowing of the alleged violation has a powerful materiality defense. The defendant who can establish that the violation alleged is not the kind of violation that has historically driven the government’s payment decisions has a similar defense. The defense team that develops these materiality arguments early — through contemporaneous documents, through depositions of government contracting officers, and through pattern evidence of the government’s actual conduct — can substantially narrow or defeat the FCA claim at summary judgment or at trial.

The plaintiff bar has responded to Escobar by attempting to limit its reach, arguing that materiality is a jury question in all but the clearest cases. Courts have divided on this question, with the Circuits taking different approaches to summary judgment in FCA materiality cases. The defense team must understand the materiality jurisprudence in the relevant Circuit, frame the materiality argument in the manner most likely to produce summary disposition in that Circuit, and preserve the materiality argument for appellate review if the trial court does not resolve it.

The Intent Requirement

The FCA requires that the defendant have acted knowingly — defined to include actual knowledge, deliberate ignorance, or reckless disregard of the truth or falsity of the claim. The intent requirement is not satisfied by mere negligence or innocent mistake. The defendant who can establish that the conduct at issue resulted from a good-faith interpretation of an ambiguous contract or regulation, or from reasonable reliance on advice of counsel, has a substantial defense to the FCA claim regardless of whether the underlying claim was technically false.

The Supreme Court’s 2023 decision in United States ex rel. Schutte v. SuperValu Inc. clarified that subjective belief matters in the scienter analysis. A defendant who actually believed at the time of submission that the claim was true has a stronger defense than a defendant who can only point to objective ambiguity in the underlying requirement. This holding has significant implications for how FCA defenses are built. The contemporaneous record of the defendant’s interpretation of the requirements, the basis for that interpretation, and the steps taken to verify the interpretation become central to the defense.

The advice of counsel defense, in particular, has taken on renewed importance. A defendant who can establish that it sought and received legal advice about the proper interpretation of a contract requirement or a regulatory obligation, and acted in good faith reliance on that advice, has a powerful intent defense. The defense requires waiver of the attorney-client privilege with respect to the advice in question, which has its own consequences, but in serious matters the waiver is often the price of preserving the case-dispositive intent defense.

The Particularity Requirement and Pleading Defenses

FCA complaints are subject to Rule 9(b) of the Federal Rules of Civil Procedure, which requires fraud claims to be pleaded with particularity. The Circuits have divided on what particularity means in the FCA context, with some Circuits requiring identification of specific false claims and others permitting reliable indicia of fraudulent claims supported by detailed allegations of the scheme.

The defense team responding to an FCA complaint must understand the particularity standard in the relevant Circuit and challenge inadequately pleaded claims at the outset. A successful motion to dismiss under Rule 9(b) can resolve the matter entirely or, more commonly, force the relator to replead with greater specificity, which provides the defense with substantially better information about the scope of the claim and the evidence supporting it.

The particularity challenge is not merely procedural. It is a tool for forcing the relator to commit to specific allegations early in the matter, before discovery has provided the relator with a broader factual basis. A complaint that survives a particularity challenge with thin allegations is a complaint that will struggle to expand at the discovery stage without amendment that the court must permit. The early procedural battle frames the substantive case that follows.

The Public Disclosure Bar and the First-to-File Rule

The FCA contains procedural defenses that can dispose of qui tam claims entirely. The public disclosure bar precludes claims based on allegations that have been publicly disclosed in specified contexts, unless the relator is an original source of the information. The first-to-file rule precludes a second relator from pursuing the same allegations as a prior relator whose complaint is still pending.

These procedural defenses are technical, but they have produced significant case-dispositive results in serious matters. A defendant who can establish that the allegations were publicly disclosed in a government investigation, an audit report, or a media report — and that the relator does not qualify as an original source — can secure dismissal of the entire qui tam action. A defendant who can establish that a prior pending qui tam covers the same allegations can do the same.

The defense team must investigate these defenses at the outset of every qui tam matter. The public disclosure analysis requires identifying every prior disclosure of the allegations and analyzing the original source qualifications of the current relator. The first-to-file analysis requires identifying every prior or pending qui tam involving the same defendant and the same allegations. This work is time-consuming, but it can produce dispositive defenses that obviate the need for substantive litigation entirely.

The Government’s Intervention Decision

Qui tam actions are filed under seal and remain sealed while the Department of Justice evaluates whether to intervene. The intervention decision is a major inflection point in the matter. Cases in which the government intervenes typically proceed to discovery, motion practice, and resolution with the government as the principal plaintiff, often with substantial enhancement of the relator’s recovery. Cases in which the government declines to intervene proceed with the relator as the principal plaintiff, with the government retaining the right to intervene later and various rights to participate in the litigation.

The defense team’s engagement during the sealed period — when the government is evaluating intervention — is one of the highest-leverage opportunities in FCA defense. The defense team that can persuade the government to decline intervention has not won the case, but has dramatically improved the defense posture. The defense team that can persuade the government to dismiss the matter entirely under its dismissal authority has effectively ended the case.

This engagement requires substantive submissions to the Justice Department lawyers handling the matter, presenting the defenses that the relator’s complaint has not addressed and the evidence that contradicts the relator’s allegations. It requires understanding what the Justice Department lawyers care about — the strength of the materiality case, the quality of the relator, the government’s other priorities in the relevant program area, and the resources required to litigate the matter. The defense team that approaches the sealed period as an opportunity to shape the government’s decision is the defense team that produces outcomes its peers cannot.

Suspension and Debarment Considerations

FCA exposure for government contractors does not exist in isolation. The same conduct that gives rise to FCA liability can trigger suspension or debarment proceedings under the Federal Acquisition Regulation. Suspension is a temporary exclusion pending the resolution of the underlying matter. Debarment is a longer-term exclusion that can effectively end a contractor’s federal business.

The defense of suspension and debarment matters proceeds on a different track from the FCA litigation, with different procedural rules and different decisionmakers. The suspending and debarring officials are agency officials, not Article III judges, and their decisions are reviewed under deferential standards that make it difficult to overturn adverse determinations.

The strategic implications are significant. A contractor that focuses exclusively on the FCA litigation while neglecting the suspension and debarment proceeding may find that the immediate exclusion from federal contracts has destroyed the business value of an eventual FCA victory. A contractor that engages effectively with the suspending and debarring official — presenting the corrective action it has taken, the responsibility assessment it has performed, and the safeguards it has implemented — can often avoid suspension or limit debarment in ways that preserve the business while the underlying matter is litigated.

This engagement requires familiarity with the FAR responsibility framework and the agency-specific practices of the relevant procurement organization. It requires presenting the contractor’s compliance posture in a manner that demonstrates the seriousness of the corrective response. It requires negotiating administrative agreements where appropriate that resolve the suspension and debarment exposure on terms compatible with the contractor’s continued operations.

The Settlement Calculus

The settlement of FCA matters is structured by statute. Treble damages, civil penalties per claim, and the relator’s share of any recovery are all elements of the settlement framework. The defense team negotiating an FCA settlement must understand not just the dollar amount but the structure of the settlement — the allocation between damages and penalties, the characterization of the conduct in the settlement agreement, and the implications of the settlement for collateral consequences including suspension and debarment.

A settlement that resolves the immediate FCA exposure on favorable terms but includes broad admissions of fault may create suspension and debarment problems that the lower settlement amount does not justify. A settlement that allocates more of the payment to penalties rather than to damages may have different tax implications for the contractor. A settlement that includes a corporate integrity agreement with the relevant agency may produce ongoing compliance obligations that affect the contractor’s operations for years.

The defense team that negotiates these settlements as integrated transactions — with attention to the immediate financial exposure, the collateral consequences, the contractor’s continuing relationship with the government customer, and the implications for related litigation — produces settlement outcomes that protect the contractor’s long-term business. The team that focuses exclusively on the immediate dollar amount may produce a number that looks favorable in the press release and proves expensive in the years that follow.

What This Practice Requires

The defense of FCA matters requires a combination of capabilities that is not commonly available in general litigation practices. Federal procurement expertise. Trial-tested defense techniques in fraud cases. Familiarity with the qui tam procedural framework. Relationships with the Justice Department lawyers who handle these matters. Understanding of the suspension and debarment process. Ability to coordinate the FCA defense with related civil and regulatory exposure.

Government contractors facing FCA exposure should retain counsel with this specific experience. The case law has accumulated to a point where doctrinal sophistication matters. The procedural framework rewards lawyers who know the framework. The relationships with the Justice Department and the agency officials shape outcomes in ways that generalist litigators cannot replicate. This is not a matter where any capable trial lawyer will do. It is a matter where the specific experience determines the result, and contractors whose exposure is serious should choose their defense counsel accordingly.

—

Otto K. Hilbert, II is a Trial Attorney with AEGIS Law. He brings over 36 years of first-chair trial and appellate experience to representing clients in complex commercial litigation, securities defense, and regulatory enforcement matters. He has tried cases in 23 states and is admitted before the United States Supreme Court and multiple United States Courts of Appeals.

This article is provided for general informational purposes and does not constitute legal advice. Readers facing specific legal matters should consult qualified counsel.