A California appellate case published in late February expands the applicability of the California False Claims Act to contractors which submit applications for payment while failing to comply with material contract terms. (SF Unified School District ex rel. Contreras v. Laidlaw Transit, Inc. (February 26, 2010) Cal. App. 2010 LEXIS 249.)  The Laidlaw case provides powerful support to public entities in their efforts to avoid fraud on public works projects, as described in more detail below.

 

After most of the qui tam plaintiff’s case was dismissed by the lower court, plaintiff school district pursued an appeal on a lone issue: that Laidlaw Transit made an implied certification with each of its payment applications that they were in compliance with its contractual requirements when it knew that it was not. The appellate court sustained a cause of action on this basis: "Plaintiffs allege Laidlaw violated the CFCA by submitting claims for payment to the District at times when Laidlaw knew it was in breach of various terms of its contract to provide student bus transportation services. The trial court sustained Laidlaw’s demurrer and ultimately dismissed the action, but we reverse. Under the CFCA, a vendor impliedly certifies compliance with its express contractual requirements when it bills a public agency for providing goods or services. Allegations that the implied certification was false and had a natural tendency to influence the public agency’s decision to pay for the goods or services are sufficient to survive a demurrer."

The Court’s reasoning would appear to apply to a broad category of contract compliance issues in government contracts: "It is reasonable for governmental entities to assume that contractors seeking payment are in compliance with the material terms of their contracts. If a contractual provision turns out to be unduly onerous or a contractor needs more time to comply, the contractor does not expose itself to liability under the CFCA if it informs the governmental entity of the problem and seeks an accommodation. But if that same contractor is aware of the noncompliance and chooses to seek payment without informing the government, then it is a fraud appropriately within the scope of the CFCA. To exclude such fraud would be contrary to this court’s obligation to construe the CFCA ‘broadly so as to give the widest possible coverage and effect to the prohibitions and remedies it provides.’ " (Citation omitted.) The act is " ‘intended to reach all types of fraud, without qualification, that might result in financial loss to the Government.’ [Citation.]"

Note that this court specifically recognized that some contracts require a separate certification of compliance with each payment application, but that this contract did not do so. Nonetheless, the court found it appropriate to still recognize an implied certification inherent in the making of the payment application, at least as to express material contractual terms.

It is likely that this decision will be appealed. Given that it appears to create new law in California, there is a better than average chance that the California Supreme Court would take some action. For the time being, however, it provides powerful support to public agencies where contractor did not comply with material contract terms and did not notify the government of that fact when it made payment applications.