Huntington Ingalls Industries Inc. (“HII”), a military services contractor headquartered in Newport, Virginia, agreed today to a $9.2 million settlement of allegations that it violated the False Claims Act (“FCA”) by over-billing the Department of Defense (“DoD”) for labor on U.S. Navy and Coast Guard ships at its shipyards in Pascagoula, Mississippi. The lawsuit was unsealed Monday in U.S. District Court in Gulfport, Mississippi.
The labor over-billing allegations were originally raised in a lawsuit using the qui tam “whistleblower” provisions of the False Claims Act. Bryon Faulkner, a former HII employee, used the provisions of the False Claims Act that permit private individuals to sue on behalf of the government for the submission of false claims to government programs and share in any recovery.
The FCA is a unique anti-fraud tool, in that it gives the government the right intervene and essentially “take over” a suit filed by a whistleblower, as it chose to do in this case.
The False Claims Act was passed in response to rampant frauds on the Union army during the U.S. civil war. Congress and taxpayers were incensed by businesses contracting with the government and profiting handsomely from selling the government rotten food, structurally unsound boots, and guns that could not fire.
More recently, in 2009, Congress passed the Fraud Enforcement Recovery Act (“FERA”) amendments, which substantially expanded the scope of potential liability under the FCA. One significant change is the elimination of the “presentment” requirement. Prior to FERA, a false claim was required to be presented directly to an officer or employee of the government, but now liability extends to any direct or indirect claim, such as contractors or subcontractors, where the receipt of government funds are involved. Contractors like HII can now also be liable for “reverse false claims” when they knowingly retain an overpayment by the government.
“Our Armed Forces depend on defense contractors to follow the rules, and this civil settlement, the second largest in the District’s history, should remind all those who conduct business with the United States Government that they are expected to abide by the rules,” said Acting U.S. Attorney Harold Britain, who also noted three earlier guilty pleas in a related criminal case in the U.S. District Court for the Southern District of Mississippi. Another individual pleaded guilty and was sentenced in 2016.
Contractors are expected to comply with their statutory obligations and act in good faith when dealing with the Department of Defense. When contractors stray from their statutory contracting obligations, their acts or omissions may become subject to the FCA. Violators of the civil provisions of the FCA are subject to treble damages plus civil penalties of $11,000 to approximately $20,000 per claim.
Faulkner’s FCA complaint focused on HII mischarging the military for labor costs incurred on hull repair diving contracts. The settlement also resolves claims that HII billed the Navy and Coast Guard for dive operations to support ship hull construction that did not actually occur as claimed. The resolution to Mr. Faulkner’s case marks the end of a four-year federal investigation into HII billing practices.
If an FCA suit proves successful, as it did here, the “whistleblower” is generally entitled to 15-30% of recovered funds. As a result of his extensive cooperation with government authorities, Mr. Faulkner will receive a $1,590,144 share of the settlement.
False Claims Act cases are often complex and require regulatory expertise not known to the average employee. In pursuing a case based on billing fraud, a plaintiff may have to employ complex statistical analyses and use expert testimony to interpret documents provided by their employer. The difference between fraud and acceptable billing is often dependent on a muddle of discrete state and federal regulations.