For the Unwary, Paycheck Protection Program May Create False Claims Act Liability
The Paycheck Protection Program (“PPP”) provided forgivable loans to assist small businesses with expenses during the COVID-19 shutdown, seemingly creating a lifeline for many of these enterprises. As explained here, a borrower could obtain a loan equal to the lesser of $10 million or the sum of its average monthly payroll costs for 2.5 months, (reduced to the extent that any individual was paid more than $100,000 per year) plus the balance of any Economic Injury Disaster Loan received between January 31, 2020 and April 3, 2020. Like many federal programs, however, participation in the PPP program requires an extensive series of certifications that could expose borrowers to liability under the under the False Claims Act (“FCA”), a Civil War era statute, that the government has continued to use to combat both government contract and health care fraud. Borrowers must, therefore, remain mindful of the key aspects of the FCA as they use PPP funds and as they apply for loan forgiveness.
Briefly, the FCA creates liability for anyone who knowingly submits a false claim, or causes another to submit a false claim, for money to the federal government. The FCA broadly defines the term “knowingly” to include actions taken with “deliberate ignorance” or “reckless disregard” of the truth of a claim. The cost of an FCA violation is substantial. The government can recover: (1) a civil penalty between $5,000 and $10,000 for each false claim, (2) three times the amount of damages actually suffered and (3) the costs of any civil action the government brings to recover a penalty or damages. In addition, the FCA’s “qui tam” provision allows private persons to bring whistleblower actions on behalf of the government, and lows such private persons to recover between 15 and 30 percent of any recovery, depending upon whether the government intervenes in the case and the quality of the whistleblower’s assistance. Qui tam actions are frequently brought by disgruntled employees, and hence, the qui tamprovision is a particular risk for PPP borrowers with displaced employees.
The PPP loan and loan forgiveness applications include several certifications which could trigger FCA liability. The loan application requires the borrower to certify that: (1) it was in operation on February 15, 2020 and had employees to whom it paid salaries and payroll taxes; (2) it needs the loan “to support ongoing operations” due to uncertainty of current economic conditions; (3) it will use the funds to retain workers and maintain payroll, or make mortgage interest, lease, and utility payments, and that not more than 25% of the forgiven amount would be for non-payroll costs; (4) it will provide the lender with documentation verifying the number of its full-time employees, and the amount of its payroll, mortgage interest, rent and utility payments during the eight week period following the loan; (5) it has not and will not receive another loan under the PPP between February 15, 2020 and December 31, 2020; and (6) the information in the loan application and supporting documents is true and accurate.
The PPP loan forgiveness application requires the borrower to (1) report the dollar value of its payroll and non-payroll costs (e.g., mortgage interest, rent or lease, and business utility payments) and (2) data concerning any reductions it made to the number of its full time equivalent employees and the salary and wages paid to employees. In addition, the loan forgiveness application requires borrowers to certify that the “dollar amount of the forgiveness” requested: (1) was used to pay authorized costs; (2) includes all applicable reductions due to decreases in the number of and/or compensation paid to full time employees; (3) does not include non-payroll costs in excess of 25%; and (4) does not exceed eight weeks of 2019 compensation, capped at $15,385 per individual. The borrower must also certify that (1) it has “accurately verified” the eligible payroll and non-payroll costs for which it seeks forgiveness, (2) it has provided required documentation to its lender, and (3) the forgiveness application is “true and correct in all material respects.”
An inaccurate certification on either application could lead to FCA litigation exposure because the PPP has been subjected to intense scrutiny by the government and the media. Attorney General William Barr asked the public to report any COVID-19 related fraud and directed the Department of Justice (“DOJ”) to “prioritize the investigation and prosecution” of any COVID-19 related fraud schemes. Shortly after the first round of PPP funding was exhausted, and reports indicated that many publicly traded companies received PPP loans, Treasury Secretary Steven Mnuchin reminded borrowers of their obligation to make truthful certifications about their need for loans, and the government demanded that certain borrowers return the loans.
To further complicate matters, the Treasury and Small Business Administration (“SBA”) have made conflicting statements about the PPP. Between April 29, 2020 and May 13, 2020, the Treasury Department issued Frequently Asked Questions (“FAQs”), indicating that the SBA will audit any loan over $2 million (FAQ 39), following the submission of a forgiveness application, but will deem any borrower who sought a loan of less than $2 million “to have made the required certification in good faith.” (FAQ 46). However, in a May 22, 2020 Interim Rule, the SBA stated that it may review loans “of any size” to evaluate whether the borrower: (1) was eligible for a PPP loan; (2) calculated the loan amount correctly; (3) used the proceeds for allowable expenses; and (4) is entitled to loan forgiveness. The SBA also reminded borrowers that they must keep documentation related to loan forgiveness for six years after the loan is forgiven or repaid. Further, these FAQs will not prevent qui tam actions by individual plaintiffs nor prevent DOJ investigations into loans under $2 million. The media continues to scrutinize PPP and several news organizations recently filed a lawsuit under the Freedom of Information seeking the identity of all PPP borrowers and the amounts of approved loans. Indeed, DOJ reportedly subpoenaed records from several large banks concerning PPP loans.
In short, the PPP is likely to be the subject of continuing scrutiny by the government, the media and plaintiffs’ lawyers. Given the amount of money disbursed through the PPP, the haste with which many borrowers sought PPP loans, and the confusion over some PPP requirements, the PPP will likely provide fertile ground for FCA litigation. Accordingly, PPP borrowers should review their applications and document the basis for any loan request, the uses for any loan proceeds, and the basis for any forgiveness request. Borrowers who have had difficulty retaining employees as planned, should consult counsel to ensure that they document their efforts to rehire or retain employees. Further, any borrower who sought a loan despite having substantial cash on hand, or which exceeded the statutory calculation, should consult counsel. In addition, borrowers who will not use loan proceeds for authorized purposes should consult counsel, especially before submitting an application for forgiveness. Finally, any borrower that receives audit requests from the SBA, which is administering the PPP, or any inquiries from the DOJ should consult counsel before responding.