Violating the False Claims Act

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Situation

A furniture company obtained various contracts from the GSA to fit out its offices. The was provided over the course of 8 years while the company simultaneously grew its sales to the general public. Prices charged to the government were sometimes higher than that charged to the company’s private customers. The price discrepancies resulted in a whistleblower complaint and government investigation.

All the information in this background comes from a Department of Justice press release and related articles.

State of the Industry

The US government doles out over $30 billion in contracts through the General Services Administration (GSA). Most of these agreements require competitive bidding, which can delay purchase of products needed on a more-timely basis. The GSA, therefore, also employs a streamlined process to procure more commonly used commercial goods and services. Provision of those goods and services sometimes incur greater supervision than competitive bidding projects, especially with respect to price, since selection of those companies is not subject to direct competition.

The government applies strict standards and take-it-or-leave-it, boilerplate language in contracts with most companies to which it gives business. Companies willingly accept the risk of these contracts in exchange for long and lucrative relationships from a customer whose credit worthiness is beyond reproach. These contracts, however, are also ripe with potential liability.

As our country’s budget deficit continues to grow, we can expect greater pressure to rein in costs. One way to do so is by publicly prosecuting and exacting significant fines from alleged abusers. The whistleblower provisions under the False Claims Act make that easier than ever for prosecutors and we can anticipate an increase in these types of cases concomitant with the bloating of the US budget.

Background and Analysis

California-based Workrite Ergonomics, founded in 1991, pioneered the design, manufacture and distribution of innovative ergonomic and space optimization products for the workplace. The company produces keyboards with unique designs, adjustable sit-stand desks and specialized monitor arms to provide for a more comfortable and productive office environment. Its parent company, Knape & Vogt Manufacturing, has annual revenues in excess of $100 million and over 500 employees.

Workrite utilizes a team of designers and engineers to incorporate modern techniques, the latest technologies, and high-quality specifications, creating products to serve its worldwide clientele, including the United States government. The company focuses on comfort and safety, believing that comfortable employees will be more productive and less likely to miss work days due to injury or bad health. Workrite’s easily-adjustable products are highly adaptable to meet a company’s specific needs or changing needs as business develops.

Workrite additionally takes care to protect the environment and the health and safety of employees, striving to develop products and processes from recycled materials and environmentally sound manufacturing methods. The company received recognition as one of the Healthiest Companies, thanks to its internal employee benefits and generous roster of wellness programs and bonuses. It’s exactly the kind of company one would expect the government to promote, not target as part of a criminal investigation.

Workrite provided office furniture to US government entities from 2009 to 2017 through the GSA’s Multiple Award Schedule (MAS) program. The MAS program provides the government with a streamlined process to procure commonly used commercial goods and services, eliminating the otherwise typical requirement of competitive bidding.

Workrite, like many companies, provides flexible pricing for bulk orders of its products. Prices may at times also be influenced by internal oversupply, the potential for additional business and other factors typically contemplated in conducting commerce.

In certain contracts Workrite fulfilled for the government between 2009 and 2017, it charged higher prices than it charged certain other private clients. This matter was brought to the attention of government regulators under the whistleblower provisions of the False Claims Act by Michael Franchek, a former Workrite sales manager.

The False Claims Act (FCA), also called the “Lincoln Law”, is an American federal law that imposes liability on persons and companies who defraud governmental programs (typically government contractors). It is the federal Government’s primary litigation tool in combating fraud against the Government. The law includes a qui tam provision that allows people who are not affiliated with the government, called “relators” under the law, to file actions on behalf of the government (informally called “whistleblowing” especially when the relator is employed by the organization accused in the suit). Persons filing under the Act stand to receive a portion (15-30 percent, depending on certain factors) of any recovered damages. As of 2019, over 71 percent of all FCA actions were initiated by whistleblowers.

The case was taken up by the Department of Justice’s Civil Division. The government alleged that Workrite did not fulfill its contractual obligations to provide GSA with accurate information about its commercial sales practices during contract negotiations and did not subsequently extend lower prices to its government agency customers as required by the GSA contract’s price reduction clause.

Workrite, faced with the prospect of lengthy and expensive litigation, along with the uncertain consequences of potentially losing at trial, elected to settle the matter for $7.1 million. Franchek (the whistleblower) received approximately $1.27 million from the settlement proceeds.

Recommendations

Government contractors face a labyrinth of additional requirements when performing work for government agencies. Many such contracts hold contractors to more stringent standards than apply to their private sector work. Ordinary and usual practices such as price fluctuation must be dealt with differently due to provisions in government contracts. Companies must also carefully monitor business conducted in other sectors and divisions to ensure it does not fall afoul of its government agreements.

Government contractors also face additional exposure presented by the FCA. While all companies should strive for full compliance at all times, that goal is aspirational. No one is perfect. The FCA, and its incentive initiative for employees to expose abuse with hopes of a large payday, puts government contractors at higher risk of potential civil and legal liability.

Any company engaged in government contract work should take extra precautions. It must mindfully assess both the work to be performed and the follow-through on its execution. It should also have the proper procedures in place to ensure compliance and minimize potential pitfalls.

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