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Defense contractors thinking about committing fraud against the federal government need to be aware of the False Claims Act penalty.

false claim act penaltiesTo help convince would-be fraudsters not to try defrauding the federal government, the False Claims Act penalty is severe. Steal from the federal government? Get caught? Fraudsters face paying amounts of money that vastly exceed what they originally stole. But is the penalty greater if the False Claims Act violator is a defense contractor? The short answer is no.

Does the False Claims Act Apply to Defense Contractors?

Yes. In fact, the False Claims Act applies to anyone who tries to defraud the federal government. This includes knowingly submitting a false claim to the federal government or causing another to submitting a false claim to the government. Additionally, the False Claims Act will apply to anyone who lies with the purpose of having a false claim paid by the federal government.

Defense contractors are notable because their primary client and source of revenue will almost always be the federal government. Therefore, a variety of government contracts are between the federal government and defense contractors.

Defense contractors aren’t the only group of businesses that commonly fall under the False Claims Act. The healthcare industry is another area of business that finds itself in trouble with the federal government and allegations of fraud.

The reason the healthcare and military industries seem to always have companies in trouble with the False Claims Act is thanks to how much money the federal government spends in those two areas. Each year, the federal government spends trillions of dollars on military and healthcare spending by sending payments to thousands of companies and individuals. It’s no wonder that at least a few defense contractors (and healthcare companies) will find themselves running afoul of the False Claims Act.

What Penalties Are Possible Under the False Claims Act?

There are two major types of penalties that defense contractors (or anyone else) could find themselves paying to the federal government. The first one concerns monetary penalties that apply for each fraudulent offense. Within the past few years, this amount rose (adjusted for inflation) to about $10,700 to $21,500 per violation.

The second type is treble damages. This sounds complicated. But the word treble is just legalese for the word “triple.” In other words, treble damages simply three times the actual damages.

Seeing the False Claims Act Penalties Provisions at Work

When these penalties apply to a specific fraud, we can see how they can result in the violator paying far more than the actual amount of money stolen. We will examine two examples to illustrate.

In the first example, let’s say the federal government enters into a contract with a defense contractor to buy a new service pistol for its armed forces.

The important terms of the contract state the federal government will buy 500,000 pistols for $500 each and that each pistol must be able to survive 10,000 shots fired before needing repair or replacement.

In the middle of production, the defense contractor realizes the pistol has a design flaw where it will only survive 5,000 shots fired before needed repair or rebuilding. However, the upper executives at the defense contractor ignore this information and pretend nothing is wrong, then ship the 100,000 pistols to the federal government.

Several years later, after numerous reports of unreliable operation of the pistol, the United States military realizes the pistol cannot last for 10,000 shots before needing repair or rebuilding. The federal government investigates what went wrong. With the help of a whistleblower, the government learns that the pistol could not meet the requirements and the defense contractor knew that but said nothing. What are the potential penalties for the defense contractor?

  • Actual damages = $50 million (100,000 x $500)
  • Treble damages = $150 million ($50 million x 3)
  • Penalties = Between $1.07 billion and $2.17 billion (100,000 x $10,700 or 100,000 x $21,700).

This defense contractor made $50 million but faces over a billion dollars in penalties. That’s because there were penalties imposed for each claim, and there were 100,000 individual claims. But even if there are only a few claims, a defense contractor’s damage can still be high.

In a second example, a defense contractor agrees to design special software for use in the Navy’s new destroyers.

Because there are five destroyers, the federal government will purchase five copies of the software, which cost $10,000 per copy. One of the important provisions in the contract is that the software must be immune from any virus for the first year of operation.

After only six months after installation on the five destroyers, all five of the destroyers suffer computer virus attacks. It turns out that the defense contractor that designed the software knew of security weaknesses in the software and could have easily made fixes, but decided not to and said nothing to the federal government. This defense contractor faces the following potential damages:

  • Actual damages = $50,000
  • Treble damages = $150,000
  • Penalties = Between $53,500 and $108,500 ($10,700 x 5 or $21,700 x 5)

In this example, the defense contractor made $50,000 but will have to pay at least $200,000 in penalties.

Need to Figure Out What False Claims Act Penalties May Apply to Your Case?

Click to find out more about the False Claims Act penalty by contacting Bothwell Law Group online.