The COVID-19 epidemic and the unprecedented economic dislocation triggered by the outbreak and state and federal governments’ extraordinary restrictions on business have prompted what may ultimately prove to be the largest federal spending program in American history, dwarfing the New Deal of the 1930’s and the response to the 2008 financial crisis.
The Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”) was adopted on March 27, making $2.2 trillion available for a variety of relief programs. One major aspect of the CARES Act involved the establishment of a new Small Business Administration (SBA) loan program, the “Paycheck Protection Program” (PPP), which made $350 billion in forgivable loans to finance certain specified business expenses, primarily payroll. As of today, April 24, 2020, Congress passed and the President signed further litigation adding another $310 billion to the PPP program.
Generally, the PPP authorizes SBA lenders to make emergency loans, guaranteed by the SBA, to enable businesses to remain in operation despite the COVID-19 restrictions on their operations. PPP funds may be used for limited, specified purposes, including qualified payroll, rent, utilities, and mortgage interest. One major departure from ordinary SBA loans is a forgiveness provision, in which borrowers may apply for forgiveness of loans that meet specified conditions. To qualify for forgiveness, for example, funds must be spent on qualified expenses during the “covered period” (generally, the eight-week period after the loan is funded). To obtain PPP loans, borrowers must certify (among other things) that relief is necessary to support ongoing operations, and that the current economic uncertainty makes the loan necessary.
Additional hundreds of billions of dollars of funding is also being dedicated to the healthcare, financial, aviation and other sectors.
Historically, extraordinary government spending has been met with a heightened risk of fraud. One of the government’s primary tools in combating fraud on public spending programs is the False Claims Act (“FCA”), 32 U.S.C. § 3729 et seq. The False Claims Act was signed by President Lincoln during the Civil War, in response to abuses by government contractors. (United States v. Bornstein, 423 U.S. 303, 309 (1976). “Congressional hearings at the time revealed instances of the same horses being sold twice to the army, sand being substituted for gunpowder, and crates full of sawdust shipped to the front lines labeled as muskets.” (Wilkins v. St. Louis Hous. Auth., 314 F.3d 927, 933.)
The False Claims Act is a powerful remedial statute. Its sharp “teeth” includes civil penalties of up to $10,000 per “false claim,” and a provision holding violators liable for treble damages, i.e. three times the amount of damage the Government actually sustains, plus attorney’s fees. Another unusual, and (to violators) dangerous aspect of the False Claims Act is its provision for so-called “qui tam” lawsuits, brought by “relators,” or whistleblowers (or, even more colloquially, “bounty hunters”), who are authorized to bring suits for false claim on the government’s behalf and obtain a share (between 15 and 25 percent) of any money recovered. (See 31 U.S.C. § 3730.)
Previous extraordinary, emergency government spending programs were, predictably, followed by equally dramatic increases in FCA litigation. Even years after the 2008 financial crisis, billions of dollars annually were still being recovered by qui tam relators in litigation arising from government response programs. It is likely that the flood of government money being poured out in response to COVID-19 crisis will have equal or greater results.
The False Claims Act makes liable anyone who “knowingly presents, or causes to be presented, a false or fraudulent claim for payment or approval,” or “knowingly makes, uses, or causes to be made or used, a false record or statement material to a false or fraudulent claim.” (31 U.S.C. § 3729(a)(1)(A), (B).) “Knowingly” includes not only actual knowledge, but also “reckless disregard” and “deliberate indifference.” Although ordinary negligence and “innocent mistake[s]” are not sufficient to establish liability (see United States ex rel. Hochman v. Nackman, 145 F.3d 1069, 1073 (9th Cir. 1998)), no proof of specific intent to defraud is required. (31 U.S.C. § 3729(b).)
The “archetypal” qui tam FCA action is “filed by an insider at a private company who discovers his employer has overcharged under a government contract.” (United States ex rel. Hopper v. Anton, 91 F.3d 1261, 1266 (9th Cir. 1996).) However, other theories also support recovery, including (of particular import in the context of the PPP and other targeted COVID-19 government relief programs) false certification. (Id.) That is: Even if a government contractor does not provide the proverbial “sand instead of gunpowder,” and actually provides the goods or services contracted for – if certification of compliance with laws, rules or regulations is a prerequisite to obtaining a government benefit –a false certification of compliance will support FCA liability. (Id. at 1266-1267.)
The PPP (to use one example) contains multiple opportunities for an aggressive “relator” to argue that a company seeking PPP relief issued such a “false certification.” Even if a company carefully complied with the financial details of the PPP program – making sure to document that loan funds were only expended on permitted expenses – a relator might challenge the firm’s certification that the loan was “necessary” as a result of the COVID-19 economic crisis (as opposed to, for instance, existing financial distress), or that it was actually “necessary” to support ongoing operations.
Potential inability to make such certifications in good faith may be part of the reason a number of high-profile, well-heeled companies have withdrawn PPP applications or declined funding. Although the Government acted aggressively, and, potentially, left some of the details of the PPP program dangerously vague, it should be clear that this is not “free money” for anyone’s taking. A false-certification FCA claim could be catastrophic, requiring not only return of the loan funds, but treble damages, penalties and attorney’s fees.
It remains to be seen how strictly future courts hearing FCA cases will measure the good faith of certifications and statements necessarily made in haste and under the extremely uncertain conditions of the COVID-19 crisis, not to mention the “Oklahoma land rush” nature of the scramble for the limited PPP funding by more companies than could be funded. In the meantime, recipients of PPP and other funding can adhere to best compliance practices, including carefully documenting all expenditures of PPP funds, segregating funds in separate accounts, and documenting all communications with bank and SBA representatives-particularly when purported waivers or departures – even technical – from requirements are involved, and generally ensuring accuracy in applications and certifications.
Author: Thomas J. Eastmond, Associate, Enterprise Counsel Group