Companies Doing Business With State or Local Governments May Be Liable For Submitting False Claims If They Are Not In Compliance With Contract Terms When They Present An Invoice Or Payment Request To The Government.

On February 26, 2010, the Court of Appeal of California, First Appellate District, held that a government contractor who is in breach of a material provision of its contract when it submits a request for payment may be at risk of liability under the California False Claims Act (Gov. Code § 12650 et seq.), because that request for payment includes an implied certification of compliance with the terms of the underlying contract.

In San Francisco Unified School District ex rel. Manuel Contreras v. Laidlaw Transit, Inc., 2010 WL 670944 (February 26, 2010), several qui tam plaintiffs sued Laidlaw Transit, Inc. and Laidlaw Transit Services, Inc. ("Laidlaw") under the California False Claims Act ("CFCA") seeking to recover funds on behalf of the San Francisco Unified School District ("District").  Plaintiffs alleged that Laidlaw violated the CFCA by submitting claims for payment to the District at times when it knew it was in breach of various terms of its contract with the District to provide student bus transportation.  According to the complaint, Laidlaw had for years provided bus transportation services under a series of contracts with the District that required, among other things, that Laidlaw maintain certain safety standards and pollution controls.  The complaint further alleged that Laidlaw had been in breach of one or more of the material terms of the contract at the same time Laidlaw was presenting "invoices, claims or demands for payment" to the District, and specifically described how the buses were in inadequate or unsafe operating condition and failed to meet the pollution control requirements in the contact.  Plaintiffs alleged that Laidlaw presented invoices to the District with knowledge that it was in breach of the contract or acting in reckless disregard as to whether it was in breach of the contract.  

The complaint's first cause of action alleged that Laidlaw violated section 12651 (a)(1) of the CFCA by knowingly presenting false "claims" to the District when it submitted monthly invoices for payment that "impliedly certified that [it] had met each and every material term" of the contract.[1] Laidlaw's demurrer to the complaint was sustained by the trial court without leave to amend.  The court of appeal reversed the trial court's dismissal of the first cause of action, and remanded the proceeding.

On appeal, the court began by noting that the gravamen of plaintiffs' complaint was the allegation that Laidlaw sought payment from the District while knowingly failing to provide the services for which the District contracted.  Laidlaw contended that it was immune from liability under the CFCA because: (1) its invoices did not expressly assert compliance with the contract; and (2) the contract did not require certification of compliance with its terms as a prerequisite to payment.

The court began its analysis by noting that the CFCA imposes liability on any person who "[k]nowingly presents or causes to be presented to an officer or employee of the state or of any political subdivision thereof, a false claim for payment or approval," and that there is "no dispute" that Laidlaw's invoices were "claims" within the meaning of CFCA.  The first critical issue, then, was whether a request for payment under a contract includes an implied certification of compliance with contractual requirements, so that if a breach has occurred, the request would be rendered false and fraudulent.  Laidlaw argued that a request for payment only constitutes an implied certification of contract compliance if the contract requires such a certification as a prerequisite to payment.  The court disagreed, noting that the District's obligation to pay Laidlaw was conditioned upon Laidlaw's "satisfactory" performance of services under the contract.  Moreover,

It is reasonable for governmental agencies to assume that contractors seeking payment are in compliance with the material terms of their contracts...  But if [a 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.

The court went on to note that the implied certification of compliance must be "material to the government's decision to pay out moneys," but held that the complaint's allegation that the contract specified that payments were for services "satisfactorily performed" was sufficient to survive the demurrer.  Finally, the court rejected Laidlaw's argument that plaintiffs had not alleged facts showing causation, holding that the causation requirement only applied to plaintiffs' claims for damages, not to plaintiffs' claim that Laidlaw was liable for statutory penalties. 

This decision represents a significant shift away from prior interpretations of the CFCA requiring either that (1) the contractor had expressly certified compliance with the contract terms as part of its payment request, or (2) the underlying contract expressly required compliance with its terms as a prerequisite to payment.  Under the implied certification of compliance theory approved by the Laidlaw Transit decision, state and local governments now may seek not only traditional contract damages, but also CFCA treble damages, statutory penalties and attorneys' fees when a material contract breach has occurred. 

For more information, please contact Sandra Edwards at [email protected] / 415.954.4428 or Stephanie Skaff at [email protected] / 415.954.4495.

[1] Plaintiffs' other causes of action did not survive the demurrer and were not relevant to the court's opinion.