U.S. Paycheck Protection Program Loan Recipients: Risks of Qui Tam Actions under the False Claims Act

On March 27, 2020, the Coronavirus Aid, Relief, and Economic Security Act (CARES Act) established the Paycheck Protection Program (PPP), making available nearly $350 billion in loan funding to small businesses impacted by COVID-19 through the U.S. Small Business Administration (SBA). After the depletion of that initial funding in just two weeks, the federal government breathed new life into the PPP with the authorization of an additional $310 billion in funding under the Paycheck Protection Program and Health Care Enhancement Act (PPP & HCE Act). Now, as of May 14, 2020, more than 2.7 million loans to small businesses, totaling nearly $193.7 billion, have been approved in Round Two of the PPP—on top of the nearly 1.7 million loans approved during Round One.

With millions of businesses applying for and receiving PPP loans, these businesses and private equity firms should be aware of the potential regulatory and legal risks. In particular, the federal False Claims Act (FCA) has served as a powerful tool for the federal government to investigate and initiate actions related to federal funding. Under the FCA, it is unlawful to make materially false claims or false statements in connection with the receipt of funding through government programs. See 31 U.S.C. § 3729. While primary enforcement of the FCA is vested in the U.S. Attorney General, the FCA also authorizes private citizens to bring civil actions on behalf of the government, i.e., a “qui tam” lawsuit. See 31 U.S.C. § 3730. In a qui tam action, an individual, known as a “relator,” brings suit to help recover government funds lost to fraud, with the incentive of receiving a portion of any monetary recovery. So while companies should expect increased federal government scrutiny and actions over their PPP loans in the coming months and years, they should also be aware of the potential risk for private citizen suits under the FCA and what to do if a qui tam action is filed against them.

Potential Risks

1. Any company receiving government funding through the PPP is at risk of being faced with a qui tam action under the FCA. Given the economic downturn and the potential for reward, there is risk of increased private citizen enforcement, including the possibility of meritless claims that may be brought by disgruntled employees who may have had their wages cut or lost their jobs due to the COVID-19 pandemic.

2. It is not only employees who can bring FCA qui tam actions. Subject to certain limitations, any person or entity with personal knowledge of the alleged fraud can file suit if not already brought by the government (e.g., competitors, public interest groups, contractors).

3. Private equity and venture capital funds may also be exposed to potential liability for actions of their portfolio companies where they are actively managing or engaged in operational decisions, particularly any involvement with respect to the application for the PPP loan or the use of such funds. The FCA applies broadly to “any person” who “presents, or causes to be presented” false claims or who “makes, uses, or causes to be made or used,” any materially false statements. See 31 U.S.C. § 3729(a)(1)(A)-(B).

4. In particular, venture-capital and private-equity-backed companies should be wary of allegations of fraud with respect to the company’s certification of the necessity of the PPP loan request, given their potential access to alternative sources of liquidity sufficient to fund operations.

a. New SBA guidance indicates that companies (together with affiliates) borrowing less than $2 million will be deemed to have made the necessity certification in good faith.  While this makes the threat of FCA actions less likely, the guidance does not expressly preclude such an action, including one brought by a private citizen, based on the necessity certification – much less claims relating to other certifications made in the application process (as noted below).

b. All loans with an original principal amount in excess of $2 million, and other loans the SBA deems appropriate, will be subject to SBA review and scrutiny. If the SBA determines and notifies a company that there was an inadequate basis for its necessity certification, but the company repays the loan, SBA has stated that it will not pursue administrative action or refer the matter to other agencies.  As above, while this may reduce the risk of FCA actions, it would not necessarily prevent a suit by DOJ or a qui tam action.

c. The SBA will also deem necessity certifications to have been made in good faith (i.e., provide a safe harbor) for any borrower who repays their loan in full by May 18, 2020. Although this does not preclude FCA actions, in the case where a company has repaid a PPP loan in full, the government’s damages—and thus a  relator’s potential monetary incentive to bring a qui tam suit—should be greatly reduced, if not eliminated.

5. In addition to potential FCA claims related to necessity certifications, relators could potentially challenge the veracity of other certifications or statements made to the SBA, such as those relating to the number of employees, company affiliations, calculations of the maximum loan amount for which the company is eligible, fund expenditure, or other criteria for loan eligibility.

6. Potential damage awards in such actions can be significantly higher than the money that was borrowed through the PPP. The FCA authorizes an award of up to three times the amount of the government’s claimed damages, as well as thousands of dollars in civil penalties for each false claim.

For a more general overview of the various types of legal risks your organization may face as a result of COVID-19, including as a result of participation in the Paycheck Protection Program, please see Goodwin’s April 24, 2020 Client Alert, “COVID-19 Litigation and Government Investigations in the U.S.: What We Are Seeing Now, and What the Future Holds."

What to Do If Threatened or Faced with a Qui Tam Action

1. Do not ignore and take seriously any complaints or allegations of fraud that you may receive before they rise to the level of litigation.

2. If you are threatened or already faced with a qui tam action relating to you or your portfolio company’s participation in the PPP, we advise that you retain experienced legal counsel immediately.

3. Conduct an independent, internal investigation into the alleged wrongdoing through counsel.

4. Collect documentation demonstrating the accuracy and veracity of certifications or statements made in a PPP loan application, including with respect to the necessity of the loan and unavailability of alternative funding sources, or otherwise presented to the federal government.

5. Collect documentation showing appropriate expenditure of PPP funds.

6. Refrain from taking any action that could be viewed as retaliation against any qui tam relator who is one of your employees, contractors, or agents. The FCA provides for relief for any employee, contractor, or agent who is “discharged, demoted, suspended, threatened, harassed, or in any other manner discriminated against in the terms and conditions of employment,” including two-times back pay, plus interest, and additional damages. See 31 U.S. Code § 3730(h).

In the event your company is still applying for a loan through the PPP, please see Goodwin’s April 9, 2020, Client Alert, “Applying for U.S. Paycheck Protection Program Loans: Lessons Learned From Experience with TARP and Other Crisis Aid” for best practices to mitigate risks of PPP participation.

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