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Maryland Expands False Claims Act – and Potential for Business Liability

In 2015 the Maryland legislature passed a false claims act similar to the Federal False Claims Act, with similar potential for broad interpretation against the businesses subject to it.

Previously, the Maryland act applied only to the healthcare industry, but the new law expands it to anyone doing business with state or local governments. The purpose is to provide a new weapon for Maryland regulators to wield against unscrupulous contractors, but it may also give rise to qui tam plaintiffs’ attorneys stretching liability to unsuspecting businesses.

In basic terms, the law now allows the state, a county government, or a qui tam plaintiff (a private citizen who has not necessarily been harmed) to sue for recovery of government funds, treble damages, civil penalties and attorneys’ fees from a contractor involved in a false claim. The classic false claim exists where a contractor submits a requisition for payment for work that the contractor did not perform. Like the federal False Claims Act, the Maryland act also extends to subcontractors who submit claims to a general contractor who then passes the claim to the government. While it is easy to applaud the takedown of a contractor who submits a false claims act on this basis, potential liability under Maryland’s law can extend to subcontractors and general contractors who frontload their billing or try to bill in advance of their work to increase cash flow to pay for materials and labor – all fairly common practice in the construction business.

The federal FCA also imposes liability for express certifications, and in some federal jurisdictions, for implied certifications, that certain conditions for payment have been met. FCA issues can arise in a multiplicity of areas involving express and implied certifications and there is no reason to believe Maryland will be any different. For example, many state projects require certified payrolls and compliance with various other employment laws. Conceivably, a Maryland FCA action could arise from the use of illegal workers, underpaid workers or unqualified workers.

In the same vein, the Maryland and federal FCA both recognize a “fraudulent inducement” theory wherein a contractor is liable for overstating or misstating its qualifications to receive the contract. Such liability often arises in the context of minority business enterprise (MBE) and other set-aside contracts.

For example, a contractor may commit to sourcing a certain percentage of a contract to a MBE or enter into a joint venture agreement with a qualified MBE but warrant that the MBE is the controlling partner in the venture. In many instances, FCA issues arise where the work is not provided to the MBE or the MBE is not really in control over the operations.  Again, it is easy to applaud the application of the FCA to the common situations where a large contractor partners with a bogus MBE to procure a contract. But FCA liability sometimes extends to small set-aside contractors that start out as MBEs but find their MBE status unexpectedly compromised by the potential controlling influence of other, larger businesses they may approach for financial backing or help in obtaining bonding and lines of credit.  Too often, these practical business considerations become fodder for qui tam plaintiffs.

One significant difference between the Federal FCA and the Maryland FCA, however, is that a claim under the Maryland law may only proceed if the government elects to initiate its own FCA claim, whereas under the federal FCA, a qui tam plaintiff can proceed regardless of any government intervention.

Qui tam actions are on the rise at the federal level. The new Maryland law, which applies to claims made on or after June 1 of this year, seems likely to attract similar activity in Maryland.

For more information please contact Matt Hjortsberg at 410-583-2400 or hjortsberg@bowie-jensen.com.

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