President Trump signed an executive order calling for increased monitoring and enforcement of laws that require — or express a preference for — domestic goods, services, and labor. Of particular note to government contractors, Trump’s order requires more rigorous enforcement of “Buy American” laws that require agencies and government contractors to procure goods, products or materials that are produced in the United States.
To that end, the Trump administration has called for the “Immediate Enforcement and Assessment of Domestic Preferences According to Buy American Laws.” Specifically, “[e]very agency shall scrupulously monitor, enforce and comply with Buy American Laws… and minimize the use of waivers.” The Trump administration’s heightened interest in Buy American Laws raises significant False Claims Act (“FCA”) compliance and enforcement concerns for government contractors. These concerns, worsened by the DOJ’s increased FCA penalties and the Supreme Court’s recent Escobar ruling on materiality and implied certification, will require American contractors to implement stronger prophylactic measures, including more robust internal auditing and compliance training.
FCA Compliance Concerns
The past 12 months have been marked by increased FCA risks and penalties. The Supreme Court’s landmark decision in United Health Service v. United States ex rel. Escobar[1] has had the most substantial impact on FCA jurisprudence and the landscape of FCA litigation since the 2009 amendments. In Escobar, the Court clearly stated that implied certification can be a basis for FCA liability where (i) the “claim does not merely request payment but also makes specific representations about the goods or service provided;” and (ii) the “defendant’s failure to disclose noncompliance with material statutory, regulatory, or contractual requirements makes those representations misleading half-truths.”[2] As the potential for liability has increased, so has its magnitude; the DOJ has increased per-violation from USD 5,500 to USD 10,781 and the maximum penalty from USD 11,000 to USD21,563. 81 Fed. Reg. 42491 (June 30, 2016).
The executive order magnifies these problems in two main ways.
First, it clearly demonstrates that the “bought in America” and “hired in America” requirements are material provisions of certain government contracts and, therefore, will likely fall within the purview of Escobar.
Second, and perhaps more importantly, it signals that the government itself may take a more active role in investigating and ferretting out fraud. Over the past 20 years, the number of qui tam suits has risen considerably, whereas the number of government-initiated false claims matters has dropped at a steady rate. Currently, the vast majority of FCA suits are qui tam actions brought by whistleblowers; they are not the result of government investigations. Trump’s recent order suggests that this trend might change, and the administration may rely less heavily on whistleblowers and more on government-initiated investigations. Not only will this result in an additional layer of scrutiny, but government attorneys who are trained in compliance and enforcement issues are now significantly more likely to notice non-compliant representations.
Next Steps
Given the executive order directive that federal agencies aggressively review contracts and agreements over the next 150 days for non-compliance with Buy American laws, government contractors must take a fresh look at the current agreements and compliance certifications in place. Government contractors’ records will likely be subject to increased scrutiny and it is in their best interests to audit their current agreements, products and supply chain arrangements to spot any potential issues before the DOJ does.
If you have any questions regarding how the administration’s order impacts your company, need assistance responding to a request from the federal government or require aid in developing a compliance strategy to reduce your company’s risk in the face of the latest Trump administration measures, contact a member of the Baker McKenzie False Claims Act practice team listed below.
[1] 136 S. Ct. 1989 (2016).
[2] Escobar, 136 S. Ct. at 2001.
