Construction and the False Claims Act: A Recent Settlement with the Justice Department Underscores Risk to Primes, Subs, and Suppliers

At Dorsey’s recent Advanced Construction Law Boot Camp, we noted that while the construction industry is accustomed to operating in a risk-filled environment, the risks associated when doing business with the government—including whistleblower False Claims Act suits, treble damages, and debarment—are different in form and degree.  A recent settlement between a construction company and the Department of Justice emphasizes the broad reach of the FCA and the substantial liability that “mere retention” of an overpayment can impose on construction contractors, even when they are subcontractors or suppliers several steps removed from a government contract.

In 2008, Bartlett Holdings, Inc., contracted with Bechtel Power Corp. to support Bechtel’s prime contract with the Tennessee Valley Authority (TVA) regarding a nuclear plant construction project, wherein Bechtel provided professional engineering, procurement, and construction services to the TVA for the project.  Bartlett provided technicians to Bechtel under a staffing contract, under which Bartlett was to be reimbursed for, among other things, its actual costs of payroll taxes.  The TVA was ultimately footing the bill for the project. 

In 2014, Marlon Azada filed a qui tam action in the United States District Court for the Eastern District of Tennessee, alleging that TVA reimbursed Bechtel who then paid Bartlett for payroll taxes incurred for Bartlett employees working on TVA’s behalf under the staffing contract.  Azada alleged that the TVA overpaid Bartlett for payroll taxes, and that Bartlett knowingly held on to and did not refund those overpayments to the TVA.  While denying wrongdoing, Bartlett recently agreed to pay $2.8 million to settle the lawsuit.  See United States ex rel. Azada, No. 1:14-cv-151 (E.D. Tenn. filed March 22, 2014)(dismissed May 5, 2016). 

This settlement underscores the long-arm of the FCA: subcontractors and suppliers may be subject to alleged FCA violations even when they share no privity of contract with the Government.  Second, it illustrates the extent of the so-called “reverse false claim,” which can impose significant liability for the “mere retention” of an overpayment.  Finally, it represents another in a steady if not quickening drumbeat of FCA cases involving subcontractors and suppliers on Federal construction projects.