October 2014

Federal Grant and Contract News for Nonprofits - October 2014

5 min

October 2014 saw several court decisions with notable implications for federal nonprofit grant recipients. After a federal judge dismissed his False Claims Act suit against George Washington University, the plaintiff (a former grant director terminated by the university) has appealed his case. In Florida, a federal district court limited the ability of an agency – in this case, the Federal Emergency Management Agency (FEMA) – to de-obligate funds previously committed to grant recipients under the Stafford Act.

Former George Washington University Grant Director Appeals Dismissal of False Claims Act Lawsuit

On October 8, 2014, a former grant director for George Washington University (GW) appealed the dismissal of his False Claims Act (FCA) lawsuit against the university, in which he claimed that he was terminated because he complained about fraudulent practices relating to a $5 million U.S. State Department anti-terrorism contract.

The lawsuit alleges that GW attempted to pull a bait-and-switch on the federal government by removing (with the intention of replacing) the plaintiff as principal investigator on a subcontract without notifying the government or the prime contractor of the key personnel change. The plaintiff further alleges that he was illegally fired three weeks after complaining to GW's management that a university employee was attempting to replace him on the subcontract.

The U.S. District Court for the District of Columbia dismissed the lawsuit, holding that neither the prime contractor nor the university actually submitted any claims for payment that falsely stated the plaintiff was working on the subcontract. Further, the court explained that the former grant director's "theory that a series of hypothetical events might have resulted in the submission of false claims does not provide a reasonable basis for his allegations under the FCA." For more information regarding the lawsuit, click here.

This case provides several useful insights for nonprofit grant recipients. First and foremost, employers must address employee concerns to avoid FCA claims under the qui tam provision of the FCA. Nonprofits should have a whistleblower policy in place that sets forth how the organization will proceed with investigating claims of grant mismanagement. This policy should be circulated among employees so that the process is transparent. Whistleblowers often report matters directly to the government or file qui tam suits because they did not feel their concerns were heard and/or reviewed by their employers. Second, the case affirms again that a violation of the FCA must be based on claims that are, in fact, false. Accurate and truthful submissions to the government can defeat an FCA claim. Nonprofit grantees should ensure that employees submitting backup documentation to the government (1) are aware of the required terms of the grant or contract and (2) submit accurate information demonstrating the allowability of their costs and their compliance with the agreement. Finally, nonprofit grant recipients should heed the warning that substitution of principal investigators or key personnel should be done in full compliance with the applicable grant or contract to avoid fraud charges.

Federal District Court in Florida Limits the Ability of FEMA to De-Obligate Funds Previously Awarded under the Stafford Act

On September 18, 2014, the United States District Court, Southern District of Florida, issued its decision in South Florida Water Management District v. Federal Emergency Management Agency, 2014 U.S. Dist. LEXIS 133153 (S.D. Fla. Sept. 17, 2014). In this case, the South Florida Water Management District challenged FEMA's decision to de-obligate funds awarded to the district after several hurricanes devastated the area in 2004 and 2005.

Under the Stafford Act, the district received public assistance grants from FEMA to repair 52 hurricane-damaged canals. In 2010, FEMA reviewed each of the 52 funded projects and determined they were ineligible for funding according to existing statutes as well as FEMA's internal regulations and policies. Specifically, FEMA concluded it lacked authority under the Stafford Act to fund such repairs if another federal agency "has specific authority to restore facilities destroyed by an event which is declared a major disaster." FEMA determined that because the district could have received assistance from either the U.S. Army Corps of Engineers' Levee Rehabilitation Program or the National Resources Conservation Service's Emergency Watershed Protection Program, it was improper for FEMA to provide grant money. As a result, FEMA informed the district in 2012 that it was de-obligating the funds from the 52 repair projects, which totaled $23.5 million.

The district protested FEMA's actions before the court, arguing that FEMA was statutorily prohibited from de-obligating the funds. In sum, the district argued that 42 U.S.C. § 5205(c), enacted as part of the Disaster Mitigation Act of 2000, provides:

A State or local government shall not be liable for reimbursement or any other penalty for any payment made under this [Act] if –

  1. the payment was authorized by an approved agreement specifying the costs;
  2. the costs were reasonable; and
  3. the purpose of the grant was accomplished.

In its opinion, the court found all three requirements present, rejecting FEMA's argument that the Stafford Act did not apply because the initial payments were contrary to FEMA's regulations. The court ruled that if the three conditions of 42 U.S.C. § 5205(c) are met, FEMA cannot de-obligate funds previously granted to recipients, and "any error FEMA made in originally applying its regulations and policies is irreversible."

Notably, this case creates helpful precedent that an agency's initial decision may be binding on the agency in the event it changes its position. Accordingly, nonprofit grant recipients should obtain agency guidance in writing and maintain a file with all correspondence and communications.