On May 3, 2016, the U.S. Railroad Retirement Board (“RRB”) issued an interim final rule adjusting civil False Claims Act (“FCA”) and Program Fraud Civil Remedies Act (“PFCRA”) monetary penalty amounts for the RRB.  The interim final rulemaking resulted in an increase of the PFCRA maximum to $10,781 and a new FCA range of $10,781-$21,563.  Because the adjustment was mandated to all federal agencies, contractors can expect to see civil penalties rise for all agencies with which they contract, all effective by August 1, 2016.  This includes the FCA, Office of Safety and Health Administration violations, and the Foreign Corrupt Practices Act.

This adjustment is the result of Section 701 of the Bipartisan Budget Act of 2015, the “Federal Civil Penalties Inflation Adjustment Act Improvements Act of 2015” (the “Act”).  Section 701 requires federal agencies to annually update “each civil monetary penalty provided by law within the jurisdiction of the Federal agency” by cost-of-living adjustments, which in turn are based on the Consumer Price Index (“CPI”).  There is no cap on adjustments.  Agencies are required to publish interim final rules with the initial penalty adjustment amounts by July 1, 2016, with new penalty levels to take effect no later than August 1, 2016.

Because most agencies have not adjusted their civil monetary penalties in many years, the Act directs agencies to make an initial “catch up adjustment” through interim final rulemaking by August 1, 2016.  The “catch up adjustment” is a single adjustment applying the cost-of-living percentage based on the difference between the CPI in October 2015 and the CPI in October of the year the agency’s penalties were established or last adjusted.  Due to the long period since most adjustments, the Act imposes a cap on the “catch up adjustment” such that it may not exceed 150 percent of the pre-adjustment penalty amount (or range) in place on the date the Act was passed.  Agency heads may reduce the adjustment amount via final rule if they determine that (1) increasing the penalty will have a negative economic impact, or (2) the social costs of increasing the penalty outweighs the benefits.

The RRB provides some insight into what other agencies may implement.  The RRB had last adjusted its penalties in 1996, increasing the maximum penalty under PFCRA to $5,500 and the minimum and maximum penalties under the FCA to $5,500 and $11,000.  However, the RRB’s interim final rule explains that the 1996 adjustment is disregarded for the “catch up adjustment” because it was done pursuant to the Inflation Adjustment Act and subject to a 10 percent cap, ultimately reducing the penalty amount.  (The authority to disregard the Inflation Adjustment Act comes from a February 2016 White House guidance memorandum.)  Thus, the RRB’s last adjustment occurred in 1986, resulting in a CPI delta of 215.628 percent.  When applied, the PFCRA maximum increased by $5,781 and the FCA range increased by $5,781 and $11,563.

This obviously has serious implications for contractors, as it could more than double the current penalties for many civil violations.  Furthermore, the effort required to reduce the adjustment by the prescribed amount is unlikely to persuade many agency heads to make the necessary determination to reduce the increase.

This type of increase would be especially problematic for contractors subject to FCA matters that involve large numbers of invoices, such as with GSA Schedule contracts.  An increase in FCA penalties by DOJ similar in scope to that implemented by the RRB, could result in penalty amounts that far outweigh any actual damages suffered by the Government.  The sheer value of a potential matter could cause a contractor to settle even where it reasonably believed that its conduct was not actionable.  At least one Circuit has held that  a whistleblower could seek FCA penalties without proving the government suffered damages.  In Bunk v. Gosselin, the Fourth Circuit held that a defense contractor allegedly engaged in a price-fixing conspiracy that purportedly resulted in more than 58,000 tainted invoices.  The plaintiff did not seek any damages and instead relied only on penalties attributable to the allegedly false invoices.  The Fourth Circuit allowed the action to stand and the Supreme Court rejected certiorari in the case.  Although the case against Gosselin was eventually set aside in January 2015 after being remanded from the Fourth Circuit, the rationale of Gosselin would be a worrisome result for contractors, especially as penalties are increased.