How businesses can defend against false claims act probes

When a business faces a lawsuit, executives generally know who brought the case and what the dispute is about. But when the government shows up with a subpoena or investigative demand, suddenly, questions swirl. What triggered the investigation? Is it a civil or criminal matter? Did an internal whistleblower come forward? What exactly does the government believe your company did?

This kind of uncertainty makes the False Claims Act (FCA) especially daunting for businesses. Originally passed during the Civil War to crack down on unscrupulous contractors defrauding the Union Army, the statute remains one of the federal government’s most powerful tools to root out suspected fraud.

How the False Claims Act Works

The FCA applies to any business submitting claims for payment to the federal government. If those claims contain false statements, even if inadvertent, a company may be liable. The penalties can be staggering: three times the government’s losses, plus attorneys’ fees. I’ve defended FCA cases involving everything from large public housing projects to advanced missile-detection technology for commercial aircraft, where the dollar figures were astronomical.

The FCA also contains a whistleblower provision, which enables private citizens with firsthand knowledge of alleged fraud to file lawsuits under seal on the government’s behalf. If the government decides the case has merit, the whistleblower is entitled to a percentage of whatever the government recovers. These payouts can reach into the tens or even hundreds of millions of dollars, creating a huge incentive for plaintiff lawyers searching for significant payouts.

Although the financial penalties under the FCA are severe, for some companies, the bigger risk is being barred from doing business with the federal government in the future. For many companies, particularly those in healthcare and defense, government contracts are their lifeblood and losing that revenue stream is a death sentence. As a result, even companies that believe they’ve done nothing wrong often feel intense pressure to settle rather than risk an adverse ruling.

Which Industries Are Most at Risk

Any industry receiving federal funds can be vulnerable, but certain industries are perennial targets. These include healthcare (billing, Medicare/Medicaid claims), defense contractors (weapons, technology, logistics) and public construction (roads, bridges, hospitals, housing projects funded with public dollars).

Of course, not all FCA claims involve deliberate fraud. For example, I represented a defense contractor that developed cutting-edge technology to protect planes from surface-to-air missiles. The government hired them to conduct multi-year testing on the feasibility of putting that equipment on airplanes.

Later, an FBI agent investigating the company for making false representations claimed the government had wasted money because “the technology didn’t work.” We pushed back. The technology worked as intended, but the government ultimately chose not to deploy it.

Similarly, I’ve represented a company providing technology for NASA spacecrafts, where the government wrongly targeted the contractor’s monthly invoices, questioning whether they had overstated their progress.

Politics and the FCA

The use of the FCA often reflects the political winds in Washington. Because it allows the government to pursue individual companies rather than enact broad industry-wide regulations, it can be a targeted way to advance policy goals without seeming to be anti-business.

For instance, we’re starting to see potential FCA scrutiny around representations related to diversity, equity, and inclusion (DEI) programs or other areas where government funding intersects with political priorities. Both Republican and Democratic administrations have used the FCA as an enforcement tool to combat what each party designates as “fraud, waste, and abuse”.

First Steps When the Government Calls

If your company receives a subpoena or investigative demand, the most essential first step is to engage outside counsel experienced in government investigations. Too often, companies try to conduct investigations themselves, speak to the government without legal guidance, or develop a response strategy before fully understanding the scope of the investigation.

Here are the top five things to do if you’re subject to a False Claims Act or other government investigation:

1. Bring in experienced outside counsel. Government investigations are resource-intensive and high-stakes. You need lawyers who do this every day.
2. Preserve documents immediately. Put a written retention policy in place and ensure employees understand the consequences of deleting relevant materials. The last thing you want is to explain to the government why someone destroyed evidence.
3. Narrow the scope. Government subpoenas are often overly broad. Experienced counsel can negotiate with the agency to clarify what information they truly need.
4. Manage personnel issues. If the investigation identifies potential bad actors, leadership will need to make careful decisions about suspensions, terminations, or public disclosures under the guidance of legal counsel.
5. Balance cooperation with defense. The government expects cooperation, and you should provide all the information they request. However, you also need someone on your side, zealously protecting your company’s interests, whether that means fighting the claims or negotiating a resolution.

False Claims Act investigations are high-stakes matters, but companies can successfully navigate them, protect their reputation and prevail.

Henry Baskerville is an experienced litigator who represents clients in complex commercial litigation, white-collar criminal investigations, government contracting matters and construction disputes. He serves as an outside general counsel to small businesses and startups and also represents clients in the cannabis and healthcare industries and is a long-time Colorado resident.