In a December 2020 speech, Deputy Assistant Attorney General Michael Granston warned that cybersecurity fraud could see enhanced enforcement under the False Claims Act (“FCA”).  On October 6, 2021, Deputy Attorney General Lisa Monaco announced that the Department of Justice (“DOJ”) would be following through on that warning with the launch of the DOJ’s Civil Cyber-Fraud Initiative.  The key component of the initiative is the use of the FCA against Government contractors and subcontractors that fail to comply with cybersecurity requirements, including information security standards and cyber incident reporting obligations, imposed by contract, statute, or regulation.

Under the FCA, the Government can recover treble damages and penalties from federal contractors and subcontractors that knowingly submit false claims for payment.  Notably, the FCA incentivizes private citizens (relators), including contractor employees, to file qui tam suits on behalf of the Government by guaranteeing them between 15 and 30 percent of the recovery.  DOJ stated that it intended to work with federal agencies, subject matter experts, and law enforcement partners on the Civil Cyber-Fraud Initiative.  Recently, Assistant Attorney General Brian Boynton confirmed that this initiative was also intended to incentivize relators and the aggressive relators’ bar to focus their attention on potential cybersecurity noncompliance as the basis for qui tam actions.

I. Building on Past FCA Enforcement

Although DOJ’s Civil Cyber-Fraud Initiative emphasizes the use of the FCA to pursue alleged noncompliance with cybersecurity regulations, the FCA has already been used for that purpose several times.  In May 2019, a federal district court in California declined to dismiss a case alleging that a Government contractor had falsely asserted its compliance with cybersecurity standards when entering into Department of Defense contracts.[1]  And in July 2019, DOJ announced that another contractor had agreed to pay more than $8 million in connection with resolving a qui tam suit alleging failure to meet federal cybersecurity standards, marking the first settlement based on FCA allegations related to cybersecurity noncompliance.[2]

With this said, at least one court rejected the attempt to build an FCA case out of alleged deviations from cybersecurity regulations for lack of “materiality.”  In October 2020, the district court in the District of Columbia dismissed a qui tam suit alleging that a contractor had failed to disclose a security vulnerability in the computer systems that it sold to the United States.[3]  The court’s dismissal was based on its conclusion that the whistleblower had failed to show that the noncompliance was material to agencies’ acceptance of the computer systems and payment under the contracts.  As the court noted, “the technology policies referenced . . . do not require defect-free products,” and that any applicable security policy could have instead been addressed by “providing the necessary assistance to eliminate or reduce vulnerabilities as they appear.”

II. Potential Types of Liability Risks

DOJ’s announcement identifies several types of actions for which it intends to hold individuals and entities accountable, including knowingly providing deficient cybersecurity products or services, knowingly misrepresenting their cybersecurity practices or protocols, and knowingly violating obligations to report cybersecurity incidents and breaches.

Compounding the risk to contractors is the fact that the initiative follows numerous other initiatives over the past few years to increase cybersecurity requirements within the Government and the Government supply chain.  For example, on May 12, 2021, the Biden Administration issued an “Executive Order on Improving the Nation’s Cybersecurity,” which intended to strengthen the Government’s ability to respond to and prevent cybersecurity threats, including by modernizing federal networks, enhancing the Government’s software supply chain security, implementing enhanced cybersecurity practices and procedures in the Government, and creating Government-wide plans for incident response.  Moreover, the Department of Defense has taken several actions to increase obligations on contractors that handle Controlled Unclassified Information, including by requiring contractors to report NIST SP 800-171 assessment scores into the Supplier Performance Risk System, and implementing a forthcoming “Cybersecurity Maturity Model Certification” program to require contractors to undergo third party assessments of their compliance with new information safeguarding requirements.

On top of these requirements, the Government has implemented other cybersecurity related supply chain initiatives recently, such as a statutory ban applicable to virtually all Government contracts under Section 889 of the FY 2019 National Defense Authorization Act, which prohibits the Government from either (1) procuring certain covered telecommunications equipment and services from unauthorized sources (“CTE/S”), or (2) entering into an agreement with any entity that “uses” CTE/S as a “substantial or essential component of any system, or as critical technology as part of any system.”[4]

Noncompliance with any of these myriad requirements could serve as the basis for scrutiny by the DOJ under its broad new initiative.

III. Observations

First, there is little doubt that the DOJ intends to move out smartly to implement its initiative.  By way of example, DOJ’s Procurement Collusion Strike Force initiative, announced in November 2019, has been very active, and currently has more than 30 active investigations.  Lisa Monaco announced a parallel initiative to police cryptocurrency enforcement in the same speech, signaling the Department’s broad willingness to assist agencies in enforcement efforts.  We can expect that the DOJ will aggressively prioritize the Civil Cyber-Fraud Initiative.

Second, the DOJ announcement indicated that the DOJ would be partnering with other federal agencies and law enforcement as part of implementation of the civil initiative.  It will be important to stay tuned as further details emerge about questions, such as how individual U.S. Attorney’s offices will be involved in the initiative; how DOJ will partner with the OIG community in investigating matters; and how Civil Division attorneys will interact with their Criminal Division counterparts and law enforcement.  For context, in less than two years, DOJ’s Procurement Collusion Strike Force has grown to include roughly 500 individual investigators and attorneys who are assigned to strike force teams in 22 different U.S. Attorney’s offices around the country.

Third, the initiative raises the stakes on contactor compliance programs.  With the threat of the FCA’s treble damages and penalties, contractors are at much greater risk when implementing required cybersecurity safeguards and when they decide whether to report a breach.  Considering the scope and complexity of recently implemented cybersecurity obligations, contractors should stay abreast of the changing regulatory landscape and ensure that they have appropriate programs in place to limit their risk of being subjected to an FCA action asserted by DOJ or relators.

 

[1] United States ex rel. Markus v. Aerojet Rocketdyne Holdings, Inc., 381 F. Supp. 3d 1240 (E.D. Cal. 2019).

[2] United States, et. al., ex. rel. James Glenn v. Cisco Systems, Inc., Case No. 1:11-cv-00400-RJA, (W.D.N.Y. July 31, 2019).

[3] United States ex rel. Adams v. Dell Computer Corp., 15-cv-608 (D.D.C. Oct. 8, 2020).

[4] CTE/S is defined under the statute as: (i) all telecommunications equipment produced and provided by Huawei Technologies Company or ZTE Corporation and their affiliates or subsidiaries, (ii) when used for certain national security or public safety purposes, video surveillance and telecommunications equipment produced and provided by Hytera Communications Corporation, Hangzhou Hikvision Digital Technology Company, or Dahua Technology Company, and their affiliates or subsidiaries, and/or (iii) any telecommunications or video surveillance services by one of the five entities or their affiliates or subsidiaries.

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Photo of Robert Huffman Robert Huffman

Bob Huffman counsels government contractors on emerging technology issues, including artificial intelligence (AI), cybersecurity, and software supply chain security, that are currently affecting federal and state procurement. His areas of expertise include the Department of Defense (DOD) and other agency acquisition regulations governing…

Bob Huffman counsels government contractors on emerging technology issues, including artificial intelligence (AI), cybersecurity, and software supply chain security, that are currently affecting federal and state procurement. His areas of expertise include the Department of Defense (DOD) and other agency acquisition regulations governing information security and the reporting of cyber incidents, the proposed Cybersecurity Maturity Model Certification (CMMC) program, the requirements for secure software development self-attestations and bills of materials (SBOMs) emanating from the May 2021 Executive Order on Cybersecurity, and the various requirements for responsible AI procurement, safety, and testing currently being implemented under the October 2023 AI Executive Order. 

Bob also represents contractors in False Claims Act (FCA) litigation and investigations involving cybersecurity and other technology compliance issues, as well more traditional government contracting costs, quality, and regulatory compliance issues. These investigations include significant parallel civil/criminal proceedings growing out of the Department of Justice’s Cyber Fraud Initiative. They also include investigations resulting from False Claims Act qui tam lawsuits and other enforcement proceedings. Bob has represented clients in over a dozen FCA qui tam suits.

Bob also regularly counsels clients on government contracting supply chain compliance issues, including those arising under the Buy American Act/Trade Agreements Act and Section 889 of the FY2019 National Defense Authorization Act. In addition, Bob advises government contractors on rules relating to IP, including government patent rights, technical data rights, rights in computer software, and the rules applicable to IP in the acquisition of commercial products, services, and software. He focuses this aspect of his practice on the overlap of these traditional government contracts IP rules with the IP issues associated with the acquisition of AI services and the data needed to train the large learning models on which those services are based. 

Bob writes extensively in the areas of procurement-related AI, cybersecurity, software security, and supply chain regulation. He also teaches a course at Georgetown Law School that focuses on the technology, supply chain, and national security issues associated with energy and climate change.

Photo of Susan B. Cassidy Susan B. Cassidy

Ms. Cassidy represents clients in the defense, intelligence, and information technologies sectors.  She works with clients to navigate the complex rules and regulations that govern federal procurement and her practice includes both counseling and litigation components.  Ms. Cassidy conducts internal investigations for government…

Ms. Cassidy represents clients in the defense, intelligence, and information technologies sectors.  She works with clients to navigate the complex rules and regulations that govern federal procurement and her practice includes both counseling and litigation components.  Ms. Cassidy conducts internal investigations for government contractors and represents her clients before the Defense Contract Audit Agency (DCAA), Inspectors General (IG), and the Department of Justice with regard to those investigations.  From 2008 to 2012, Ms. Cassidy served as in-house counsel at Northrop Grumman Corporation, one of the world’s largest defense contractors, supporting both defense and intelligence programs. Previously, Ms. Cassidy held an in-house position with Motorola Inc., leading a team of lawyers supporting sales of commercial communications products and services to US government defense and civilian agencies. Prior to going in-house, Ms. Cassidy was a litigation and government contracts partner in an international law firm headquartered in Washington, DC.

Photo of Peter B. Hutt II Peter B. Hutt II

Peter Hutt represents government contractors in a range of complex investigation, litigation, and compliance matters, including False Claims Act and fraud investigations and litigation, compliance with accounting, cost, and pricing requirements, and contract claims and disputes.

Peter has litigated more than 25 qui…

Peter Hutt represents government contractors in a range of complex investigation, litigation, and compliance matters, including False Claims Act and fraud investigations and litigation, compliance with accounting, cost, and pricing requirements, and contract claims and disputes.

Peter has litigated more than 25 qui tam matters brought under the False Claims Act, including matters alleging cost mischarging, CAS violations, quality assurance deficiencies, substandard products, defective pricing, Iraqi procurement fraud, health care fraud, and inadequate subcontractor oversight. He has testified before Congress concerning proposed amendments to the False Claims Act.

Peter has also conducted numerous internal investigations and frequently advises clients on whether to make disclosures of potential wrongdoing.

Peter also represents clients in a wide range of accounting, cost, and pricing matters, as well as other contract and grant matters. He is experienced in addressing issues concerning pensions and post-retirement benefits, contract formation, TINA and defective pricing, claims and terminations, contract financing, price reduction clauses, subcontracting and supply chain compliance, specialty metals compliance, and small business and DBE compliance. He has litigated significant cost, accounting, and contract breach matters in the Court of Federal Claims and the Armed Services Board of Contract Appeals.

Peter is recognized for his work both in government contracts and in False Claims Act disputes by Chambers USA, which notes that he is “whip-sharp, wicked smart and will advocate to the hilt for his clients.” Chambers also notes that “Peter brings a lot of thoughtfulness and creativity to cases. He is extremely clear in his communications and very responsive.”

Photo of Ashden Fein Ashden Fein

Ashden Fein advises clients on cybersecurity and national security matters, including crisis management and incident response, risk management and governance, government and internal investigations, and regulatory compliance.

For cybersecurity matters, Mr. Fein counsels clients on preparing for and responding to cyber-based attacks, assessing…

Ashden Fein advises clients on cybersecurity and national security matters, including crisis management and incident response, risk management and governance, government and internal investigations, and regulatory compliance.

For cybersecurity matters, Mr. Fein counsels clients on preparing for and responding to cyber-based attacks, assessing security controls and practices for the protection of data and systems, developing and implementing cybersecurity risk management and governance programs, and complying with federal and state regulatory requirements. Mr. Fein frequently supports clients as the lead investigator and crisis manager for global cyber and data security incidents, including data breaches involving personal data, advanced persistent threats targeting intellectual property across industries, state-sponsored theft of sensitive U.S. government information, and destructive attacks.

Additionally, Mr. Fein assists clients from across industries with leading internal investigations and responding to government inquiries related to the U.S. national security. He also advises aerospace, defense, and intelligence contractors on security compliance under U.S. national security laws and regulations including, among others, the National Industrial Security Program (NISPOM), U.S. government cybersecurity regulations, and requirements related to supply chain security.

Before joining Covington, Mr. Fein served on active duty in the U.S. Army as a Military Intelligence officer and prosecutor specializing in cybercrime and national security investigations and prosecutions — to include serving as the lead trial lawyer in the prosecution of Private Chelsea (Bradley) Manning for the unlawful disclosure of classified information to Wikileaks.

Mr. Fein currently serves as a Judge Advocate in the U.S. Army Reserve.

Photo of Michael Wagner Michael Wagner

Mike Wagner helps government contractors navigate high-stakes enforcement matters and complex regulatory regimes.

Combining deep regulatory knowledge with extensive investigations experience, Mr. Wagner works closely with contractors across a range of industries to achieve the efficient resolution of regulatory enforcement actions and government…

Mike Wagner helps government contractors navigate high-stakes enforcement matters and complex regulatory regimes.

Combining deep regulatory knowledge with extensive investigations experience, Mr. Wagner works closely with contractors across a range of industries to achieve the efficient resolution of regulatory enforcement actions and government investigations, including False Claims Act cases. He has particular expertise representing individuals and companies in suspension and debarment proceedings, and he has successfully resolved numerous such matters at both the agency and district court level. He also routinely conducts internal investigations of potential compliance issues and advises clients on voluntary and mandatory disclosures to federal agencies.

In his contract disputes and advisory work, Mr. Wagner helps government contractors resolve complex issues arising at all stages of the public procurement process. As lead counsel, he has successfully litigated disputes at the Armed Services Board of Contract Appeals, and he regularly assists contractors in preparing and pursuing contract claims. In his counseling practice, Mr. Wagner advises clients on best practices for managing a host of compliance obligations, including domestic sourcing requirements under the Buy American Act and Trade Agreements Act, safeguarding and reporting requirements under cybersecurity regulations, and pricing obligations under the GSA Schedules program. And he routinely assists contractors in navigating issues and disputes that arise during negotiations over teaming agreements and subcontracts.

Photo of Ryan Burnette Ryan Burnette

Ryan Burnette advises defense and civilian contractors on federal contracting compliance and on civil and internal investigations that stem from these obligations. Ryan has particular experience with clients that hold defense and intelligence community contracts and subcontracts, and has recognized expertise in national…

Ryan Burnette advises defense and civilian contractors on federal contracting compliance and on civil and internal investigations that stem from these obligations. Ryan has particular experience with clients that hold defense and intelligence community contracts and subcontracts, and has recognized expertise in national security related matters, including those matters that relate to federal cybersecurity and federal supply chain security. Ryan also advises on government cost accounting, FAR and DFARS compliance, public policy matters, and agency disputes. He speaks and writes regularly on government contracts and cybersecurity topics, drawing significantly on his prior experience in government to provide insight on the practical implications of regulations.