Federal Court Opinion Has Huge Impact on the Construction Industry

The United States District Court for the Eastern District of Pennsylvania in Philadelphia recently issued an opinion that should get the attention of any contractor or subcontractor performing work on a federal funded construction project. In U.S. ex rel IBEW Local 98 v. The Fairfield Company, the federal court held that a contractor on a SEPTA project could be held liable under the False Claims Act for failing to pay its workers under the Davis Bacon Act. The court found that liability was appropriate under the FCA even through the contractor did not knowingly violate the Davis Bacon Act.  The court awarded the plaintiff over $1,000,000 in damages and an additional over $1,000,000 in attorneys fees.

An Extremely Brief Primer on the FCA

A full discussion of the FCA is beyond the realm of this blog post and you could write a book on FCA cases.  But in a nutshell, the FCA prohibits a contractor from knowingly submitting a claim for payment to the federal government (or an entity receiving funding from the federal government,  like SEPTA) that is false. Importantly, knowingly does not equal actual knowledge of the falsity of the claim.  Rather, “reckless disregard of the truth or falsity” of the submission is sufficient. As explained below, this standard played an important role in the court’s decision and should give contractors performing work on federally funded projects pause.

The FCA is designed to ferret out fraud against the federal government.  In fact, its roots go back to the Civil War when Congress first passed legislation aimed at unscrupulous contractors supplying materials to the Union army. The FCA is a privateer statute in that it allows private individuals to initiate an FCA claim. The FCA incentivizes private individuals (and their lawyers) to bring FCA claims by allowing them to share in any recovery that the federal government makes.  That plaintiff in an FCA case is known as a relator (sometimes people refer to them as whistleblowers but relator is the legal term for an FCA plaintiff). Under FCA rules, the plaintiff – relator has to give the government the first crack at prosecuting an FCA claim.  If the Department of Justice declines to prosecute the FCA claim, the relator is still free to prosecute the claim on its own.

Finally, the FCA permits the award of trebel (triple) damages and attorneys fees, plus a statutory civil penalty of up to $10,000 per violation.

Again, there is much much more to the FCA than this. But hopefully this gives you a rough idea of what the FCA is.

The Fairfield Case

Fairfield had a contract with SEPTA (for anyone reading outside of the Pennsylvania area SEPTA is a regional transit authority and is an acronym for Southeastern Pennsylvania Transit Authority). Like all contracts, Fairfield’s contract required it to comply with all federal, state, and local laws. It also required Fairfield to comply with the Davis Bacon Act.

Everyone is familiar with the Davis Bacon Act. It requires contractors to pay prevailing wages to their employees when they are working on a federally funded construction project. But comply with the Act is not always simple. The Department of Labor issues wage rates for various classifications of employees. Employers are supposed to pay employees the wage rate that corresponds to the classification of work that is being performed. Where contractors run into trouble is when employees are misclassified. Sometimes this is innocent and a byproduct of the vagaries of each classification of employees.  The DOL does not provide precise definitions for each of its employee classification. Instead each classification is determined by the type of work that an employee is performing and the prevailing area standards of the classification of that employee’s work. Its confusing and sometimes an employee can be perform one classification of work with one wage rate and then perform a different classification of work with a higher wage rate. Other times it is not good-faith confusion that causes an employer to fail to comply with the Davis Bacon Act and a contractor blatantly fails to follow the classifications in paying its employees.

IBEW Local 98 brought an FCA against Fairfield alleging that Fairfield misclassified certain employees as groundmen and laborers, which were paid a lower rate, rather than journeymen, which received a higher wage rate under the Davis Bacon Act. Local 98 contended that Fairfield violated the FCA by submitting certified payroll reports with its payment applications which contained these misclassifications.

In sum (and I am condensing a lot , the opinion is over 30 pages), the court agreed with Local 98.  It found that Fairfield acted with reckless disregard for truth or falsity of it certified payroll.  It founds that accurate certified payroll is a material part of SEPTA’s payment process. And it found Fairfield liable for $1,055,320.62 in damages of which $316,596 went to Local 98 as a reward for bringing the action and the remaining $738,724.43 to the United States. The court also awarded Local 98 attorneys fees and costs, which it later determined to be over $1,000,000.

What it means

There are numerous important takeaways from this case.  I am going to hit what I think are the top 4.

1. Violating the Davis Bacon Act can serve as the basis for an FCA claim.

Probably the most important takeway is that  the court ruled that a violation of the Davis Bacon Act could serve as a basis for an FCA violation. This means strict compliance with the Davis Bacon Act is critical. In recent years, organized labor has brought FCA cases against non-union contractors based on alleged Davis Bacon Act violations. Interestingly, Fairfield appeared to be a union contractor with a CBA with a competing IBEW Local. This means union contractors are not immune to similar suits.

2. Quality control is key.

Fairfield did not simply ignore the Davis Bacon Act. Rather, the court found that it basically lacked any quality control regarding how employees were classified for payment purposes. Fairfield’s on site foreman assigned work and decided how employees should be classified. The court found this was not enough.  Contractors already struggle to properly classify employees under the Davis Bacon Act in many cases.  That difficult task just became way more important.

3. A DOL audit is no defense.

The court found that Fairfield acted with reckless disregard even though the DOL had conducted an audit and found no wage violations.   But the court said that a clear DOL audit was only evidence of compliance with the Davis Bacon Act.  It was not conclusive as a matter of law. This ruling will no doubt be the basis for an appeal.

4. Little things turn into big things.

The court found that Fairfield’s underpayment of wages was not rife. It found an underpayment of $159,273.54 in wages which represented only 13.5% of the hours worked on the project. So, how did an underpayment of about $160,000 turn into a judgment in excess of $2,000,000? Because of the FCA penalty provisions. As stated above, the FCA allows for trebel damages. So the court first permitted the $159,273.54 to be multiplied by 3 or $477,820.62. Next the court determined that each incorrect certified payroll was a FCA violation. It determined that the statutory penalty for each violation should be $5500. And it found that Fairfield had submitted 105 incorrect certified payrolls. So it imposed an additional amount of $577,500 ($5500 x 105) in statutory penalties. Finally, the Court awarded Local 98 attorneys fees and costs, which it determined to be over $1,000,000.

So, a lack of quality control that resulted in underpayment of wages on 13.5% rapidly led to a damage award of over $2,000,000.

Again, there is much more to this decision and its implication that I cannot cover in a blog post. If anyone has any questions, please feel free to contact me. I am currently at how in lockdown reading obscure case law regarding the FCA in between homeschooling my kids.

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District Court Allows DBE False Claims Act Case to Proceed

Last week, I posted about how whistleblowers continue to receive large settlements related to DBE fraud. A somewhat recent case from the federal court in Maryland shows how whistleblowers are ferreting out DBE fraud on construction projects receiving any form of federal funding.

The Case

The case involves a bridge painting project in Maryland that was let by the Maryland State Highway Administration. The contract required the prime contractor to meet a 15% DBE participation goal.  The prime contractor submitted a bid stating it would have 15.12% DBE participation.  After it was awarded the contract, the prime contractor – as is typical – submitted additional forms certifying to the MSHA that 15.12% of its contract price would be performed by a DBE firm.  The prime contractor indicated that one DBE subcontractor, Northeast Work and Safety Boats, LLC (“NWSB”), would perform the 15.12% of the work.


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Whistleblowers Continue to Receive Large Settlements in DBE Fraud Cases

It has been awhile since I last blogged about fraud involving the Department of Transportation’s disadvantaged business enterprise (DBE) program.  Trust me, the problem has not gone away. If anything, prosecutions and civil claims filed under the False Claims Act alleging DBE fraud have become so frequent, I could not write a blog post about each one.  The biggest winners in 2016 may have been the whistleblowers that brought the DBE fraud to the attention of the Department of Justice, who were awarded millions of dollars for doing their part to ferret out fraud.  Recent whistleblower settlements include:


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Is the False Claims Act Big Labor’s New ‘Area Standards’ Weapon?

In early March, the United States Federal Court for the Southern District of Ohio unsealed a complaint filed by the Painters and Allied Trade’s Council No. 6 against a painting contractor under the False Claims Act.  (A copy of the complaint can be viewed here: Complaint)  The Complaint is brought against a non-union painting subcontractor performing painting work on a project subject to the Davis-Bacon Act (prevailing wage).  According to the Complaint, the Painters Union “organizing” effort (meaning picketing, hand-billing, and bannering) at the project, where it learned that the painting subcontractor was allegedly not paying Davis-Bacon wage rates to its employees but was submitting certified payroll to the general contractor that it was (a big no-no).

As we have talked about before, the False Claims Act applies to claims submitted by contractors and subcontractors on a project receiving federal funding.  The False Claims Act permits the party bringing the claim to recover up to 30% of what is recovered for the government.   As we have said, it makes bounty hunters out of former or disgruntled employees with knowledge of a contractor’s transgression. Moreover, the False Claims Act does not require actual knowledge.  A contractor can violate the Act through deliberate ignorance (see no evil, hear no evil, speak no evil) or reckless disregard (I do not know if it is false, but its non of my business).

Damages under the False Claims Act are also significant and the party bringing the action on behalf of the government is entitled to up to three times the actual loss, plus per claim penalty and attorneys fees.  As we have said, with a False Claims Act action, even when you win you lose because of the expense in defending such a claim.

The defendant in the Painters Union case has not yet filed an answer so it is unclear what its defense will be.  However, as we have seen, unions are increasingly aggressive in increasing their shrinking market share.  We will have to see if this case is a one-off isolated incident or signals a more organized effort on the part of Big Labor.

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The Hidden Dangers of Failing to Follow DBE Rules (Part 2): The False Claims Act

Mega-law firm Wilmer Hale recently published a its 2013 False Claims Act Year in Review.  The report is an insightful read for any business dealing with the federal government.  However, two statistics in particular should stand out for the construction industry:
  • False Claims Act suits hitting an all-time high of 753 in 2013, and
  • Government enforcement concerning disadvantaged business status is a particular focus of the Department of Justice.
Background on the False Claims Act
The False Claims Act authorizes private individuals to bring a civil claim in the name of the United States against anyone who fraudulent obtained money or property from the government. The person who brings the action is entitled to 30% of the amount recovered for the government.   (For the history buffs out there, the roots of the Act date back to the Civil War and was passed in an effort to ferret out profiteering and overcharging by contractors supplying war goods to the Union. Indeed, for years the Act was known as the Lincoln Laws.)
The elements of a False Claims Act claim are:
(1) a claim or statement to get the government to pay money;
(2) that is false or fraudulent; and
(3) that defendant knew was false or fraudulent.
Importantly, actual knowledge or specific intent to defraud the government is not necessary to be liable under the False Claims Act, reckless disregard for or deliberate ignorance of the truth are sufficient.
DBE Regulations and the False Claims Act.

A contractor that fails to follow DBE rules in turn almost always violates the False Claims Act.  The violation occurs when a contractor submits a payment application that certifies that a certain percentage of work was performed by a DBE when in reality the DBE performed no commercially useful function.  Importantly, to violate the False Claims Act the contractor need not be a knowing participant in the DBE fraud so long as it is shown that the contractor recklessly or deliberately disregarded the existence (I don’t know about it and I don’t what to know about it) of the DBE fraud.


Winning is Still Losing.


The False Claims Act makes bounty hunters out of disgruntled employees.  Couple this with an increased interest on part of the trial lawyers bar makes the risk of facing a False Claims Act claim significant.  Because the Act is complex and the risks of losing so severe, defending a False Claims Act action is not cheap.  Even if a contractor successfully defends the action and it is ultimately dismissed, the attorneys fees will undoubtedly impact a firm’s bottom line.

The biggest takeaway for contractors working under a federal, state, or local DBE program is that they simply cannot ignore or fail to investigate potential wrongdoing involving the DBE program.

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