Third Circuit rules against relator on definition of federal grantee under False Claims Act

by Ben Vernia | May 21st, 2012

On May 8, the Third Circuit Court of Appeals, in U.S. ex rel. Garg v. Covanta Holding Corp., rejected a relator’s claim that fraud against a tax-exempt utility authority amounted to fraud on the federal government. The relator was the executive director of the utility district, and he alleged that a company which had a service contract to build and operate a solid waste handling facility violated the False Claims Act by failing to pay fees to the city which hosted the facility, and by failing to share income the company received from selling recyclable materials from the solid waste stream it processed. The relator argued that the alleged scheme violated the Act because the utility authority had paid for the facility’s construction from revenue generated from the sale of federally tax-exempt bonds.

The Court recognized that there was some authority for the argument that a tax exemption is tantamount to a direct payment from the federal government, but it concluded that some further nexus between the alleged fraud and government funds: “The FCA does not apply to fraud against any federal grantee; it requires that the specific money or property claimed must be intended to ‘be spent or used on the Government’s behalf or to advance a Government program or interest.'” Federal funds must be at risk, the Court reasoned, and it noted that it had previously rejected a similar argument made in a qui tam suit alleging fraud against military servicemembers, where the only nexus to federal funds was their receipt of salary payments. Because it was the utility authority (and the state of New Jersey) who were at risk, the relator’s federal claims failed. (The district court had refused to exercise supplemental jurisdiction over a state False Claims Act claim after dismissing the federal count.

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