08/26/2014 12:43 pm ET Updated Oct 26, 2014

Congratulations, You Won a Local Government Contract! Now Pay the Feds Triple!

Seems funny, right? Well, if you win a contract from a municipal government or regional authority, it turns out that if that agency did not follow federal rules in awarding the contract, a new press release from the Department of Justice (DOJ)makes it clear that the government, and therefore possibly the contract recipient too, have violated the False Claims Act (FCA).

The Washington Metropolitan Area Transit Authority (WMATA), the regional authority that runs the Metro and other transportation services in the Washington, DC area, agreed to pay more than $4 million to settle a whistleblower lawsuit claiming that a services contract it awarded should have been put out for multiple bids when instead it was sole-sourced by the agency to a company that apparently had assisted the agency in determining what work was needed.

The whistleblower claimed that federal rules required the contract be competitively bid and that the company awarded the contract could not compete because it had a conflict. So, even if WMATA's own regulations might have allowed the sole-source contract, the Justice Department agreed that WMATA falsely certified its compliance with federal rules. And not merely falsely but fraudulently. And because WMATA received a federal grant to cover some of the contract's cost, the DOJ pursued the claim under the FCA.

Let's assume that federal contracting rules are clear. (They are not.) Let's also assume that federal "conflict of interest" rules as applied to grant-funded contracts are also clear. (They are even less clear, with even more draft changes sitting in regulation limbo.) There is no shortage of irony here. It is challenging for contractors and government officials to keep track of the rules, and commenters (like myself) have long complained that every regulatory obligation should not be investigated like a criminal act, with tripled damages and penalties.

Here, a government agency itself -- funded by taxpayer dollars in the form of ridership fares and city and county government contributions -- will have to spend taxpayer dollars to pay the federal government because, as the U.S. Attorney says, WMATA must follow "rules and regulations in spending the taxpayers' money."

Now, we do not know if there was actual corruption that undermined WMATA's mission at the same time the federal competition and conflict rules were violated. The press release makes no reference to that kind of misconduct, so we have to take DOJ's word that WMATA violated federal regulations and should pay triple damages. We also must assume that WMATA did not have its own agency regulations that permitted the award -- or at least did not have any regulation that prohibited it. Then you also have federalism issues, where there are conflicts between the authority granted by quasi-state bodies and the strings attached to federal money. (The issue of whether a state government can be an FCA defendant is also the subject of litigation under the statutory language and the Eleventh Amendment, but presumably WMATA is too "local" an authority to trigger that defense.)

Surely there were other ways to encourage WMATA to follow federal award rules. How about canceling the grant, or seeking breach of contract remedies against WMATA under the grant agreement? While FCA defense lawyers might have a moment of pleasure seeing a government agency suffer under the FCA sledgehammer, the moment is fleeting. Not only will Metro's riders pay more (as well as the county and city taxpayers who contribute to WMATA), but it is WMATA's contractors who will be targeted next.

Companies who work for federal grant recipients beware: You are now a target for FCA claims despite following agency regulations. Winning a government contract is certainly never a lottery. But the more DOJ and inspectors general punish regulatory mistakes under the FCA, the more winning a government contract might seem like tunneling your way into prison.