A common problem for potential whistleblowers trying to start a case under the False Claims Act (“FCA”) is that they do not always have access to individual claims for payment made by the target defendant. Often this results because the employee does not work in the finance or billing division of the company and does not have access to this type of documentation. In some instances, however, the employee might be aware of the negotiations and documentation that led to the initial contract or grant award and might be able to identify falsities or misrepresentations at that phase of the interaction. In that situation, there may be a basis for a qui tam case under what is called the fraudulent inducement theory.
Fraudulent Inducement Theory
A cause of action for fraudulent inducement exists if a contractor makes a false statement to induce a government entity to award a grant or contract to that contractor, and the contract or grant is awarded in reliance on this false statement. E.g., United States ex rel. Marcus v. Hess, 317 U.S. 537, 542, 63 S.Ct. 379, 87 L.Ed. 443 (1943)(contractors could be liable under the False Claims Act for claims submitted under government contracts which the defendants obtained via collusive bidding); Wilson v. Kellogg Brown & Root, Inc., 525 F.3d 370, 376 (4th Cir.2008) (recognizing fraudulent inducement claim under the FCA based on obtaining a government contract through false statements); Harrison v. Westinghouse Savannah River Co., 176 F.3d 776, 785 (4th Cir. 1999)(rejecting district court’s determination that FCA liability could not rest on false statements submitted to the government to gain approval for a subcontract); United States ex rel. Hagood v. Sonoma County Water Agency, 929 F.2d 1416, 1420 (9th Cir.1991)(contract obtained based on false information or fraudulent pricing).
As the court found in U.S. ex rel. Danielides v. Northrop Grumman Sys. Corp., 09 CV 7306, 2014 WL 5420271 (N.D. Ill. Oct. 23, 2014), allegations of fraud in the inducement can include promising the government “to do work that it never intended to do” and “promising to do so, [but] never intend[ing] to provide its best efforts in performing the contract and fraudulently inducing the government to enter into the contract.” Id .at *6 n. 6.
If the government or relator can demonstrate that a contract or grant was procured by fraud, all resulting requests for payment can then be deemed fraudulent because they are based on the original false statement. E.g., United States ex rel. Longhi v. Lithium Power Techs., Inc., 575 F.3d 458, 467–68 (5th Cir.2009) (where a contract was procured by fraud, even when subsequent claims for payment under the contract were not literally false, they became actionable FCA claims because they “derived from the original fraudulent misrepresentation”); United States ex rel. Hendow v. Univ. of Phoenix, 461 F.3d 1166, 1173 (9th Cir.2006) (“liability will attach to each claim submitted to the government under a contract, when the contract was originally obtained through false statements or fraudulent conduct”); United States ex rel. Main v. Oakland City Univ., 426 F.3d 914, 916 (7th Cir.2005); United States ex rel. Bettis v. Odebrecht Contractors of Cal., Inc., 393 F.3d 1321, 1326 (D.C.Cir.2005) (“[C]ourts have employed a ‘fraud-in-the-inducement’ theory to establish liability under the Act for each claim submitted to the Government under a contract which was procured by fraud, even in the absence of evidence that the claims were fraudulent in themselves”) (citation omitted).
Fraudulent Inducement Theory Case Examples
The availability of a claim under the FCA based on invoices submitted to the government for payment pursuant to contracts that were fraudulently induced has been upheld many times. This type of claim is referenced in the legislative history of the 1986 amendments to the FCA. S.Rep. No. 99–345, at 9 (1986), reprinted in 1986 U.S.C.C.A.N. at 5266, 5274 (“[E]ach and every claim submitted under a contract, loan guarantee, or other agreement which was originally obtained by means of false statements or other corrupt or fraudulent conduct, constitutes a false claim.”) (emphasis added). Indeed, even prior to the 1986 amendments, these claims had been recognized. See, e.g., United States v. Veneziale, 268 F.2d 504, 505 (3d Cir.1959) (“[A] fraudulently induced contract may create liability under the False Claims Act when that contract later results in payment thereunder by the government ….”) (citing United States ex rel. Marcus v. Hess, 317 U.S. 537, 543–44, 63 S.Ct. 379, 87 L.Ed. 443 (1943)).
In any particular case, proof in support of allegations of fraudulent inducement would focus on promises and representations made by the target defendant at various times before the government entity awarded the initial contract, awarded any optional years or extended the contract to include different projects, or extended the entire contract at the end of the planned base and optional years. The government’s decision to contract with the target defendant for option years and extensions are all points at which the defendant can be found liable for fraudulent inducement as long as there was either an independent contract award or the situation otherwise involved representations and commitments by the defendant to procure the additional work. In Danielides, for example, the court sustained FCA claims based on allegations that defendant’s “lies induced the government to enter the phase three contract.” U.S. ex rel. Danielides v. Northrop Grumman Sys. Corp., 2014 WL 5420271, at *6 (N.D. Ill. Oct. 23, 2014) (describing how phase three of the contract had been separately awarded, even though it was contemplated from the beginning of the overall project). In U.S. v. Bae Sys. Tactical Veh. Sys., LP, 2016 WL 894567, at *4 (E.D. Mich. Mar. 9, 2016), the court rejected defendant’s argument that there could be no fraud in the inducement claims based on statements made after the initial contract award, reasoning as follows:
The Court does not find this argument availing. As Defendant admits, the September price agreement was a modification of the Contract. (See, e.g., Dkt. 19, at 16-17 (referring to the “price modification”).) The fraudulent inducement theory may apply not only when fraud is used to obtain a contract, but also when used to obtain sub-contracts or modifications to contracts. See, e.g., United States ex rel. Frascella v. Oracle Corp., 751 F. Supp. 2d 842, 855 (E.D. Va. 2010) (FCA claim sufficiently pleaded where false statements were made “with the intent to induce [the government] to enter into contract modifications”); [U.S. ex rel.] Woodlee [v. Science Applications Intern. Corp.], 2005 WL 729684, at *1-2 (master contract awarded prior to individual delivery orders, the negotiations of which were the basis of the FCA fraudulent inducement claims).
The usual materiality and scienter requirements would still apply, meaning that the relator would have to be able to allege (and ultimately prove) that 1) the commitments or information that was misrepresented during the negotiation phase and that were the predicate for the contract award were material to the government’s decision to grant the award, and 2) that the information or misrepresentations were knowingly false when made.
 To avoid repetition, this article will refer only to contracts, but the same theories apply to government grants or other awards of government business.