On October 11, the Department of Justice released a settlement agreement it entered into with a large, Florida-based automotive management company for False Claims Act violations based on an allegedly improper forgiveness of a Paycheck Protection Program loan. Up to now, the DOJ has primarily focused on obvious fraud, such as fake companies being created to obtain PPP funds. This settlement demonstrates a willingness to move into regulatory compliance as a basis for False Claims Act investigations and enforcements under the PPP.

What You Need to Know:

• The Department of Justice entered into a $9 million settlement agreement for False Claims Act violations related to the Paycheck Protection Program.
• This settlement indicates a move into regulatory compliance violations as the basis for FCA liability, and could foreshadow larger potential liabilities for PPP loan recipients.

In this action, however, the DOJ is moving into more sophisticated matters, arguing that common-ownership among multiple related entities meant that the recipient was ineligible to obtain the loan in the first place. The DOJ alleged that its initial false statement about eligibility for the loan and subsequent false statements about eligibility for forgiveness were the hook for False Claims Act liability. 

The company at issue is a Florida limited liability company which provides management services to more than 40 automotive dealers throughout the United States. It applied for and received a PPP loan in the amount of $6,282,362, which was subsequently forgiven. But only a “small business concern”, defined as a business with 500 or fewer employees or whose revenues fall below a designated threshold, qualified for PPP loans. Federal regulations require all affiliated businesses to be included in this determination, which include companies with common ownership. The DOJ alleged that the management company here was affiliated with the 40+ automotive dealers it managed, and thus was ineligible for the loan and for the forgiveness of the loan it received.

The case was initially filed by a qui tam relator. The parties all settled for a total of $9 million, $6,971,256.95 of which was designated as restitution, and the remainder was a penalty imposed under the False Claims Act. The restitution designation is important for two reasons: restitution payments to the government may be eligible for certain tax benefits, while penalty payments are generally not; and the relatively small penalty portion indicates that the DOJ did not insist on a large multiplier of the restitution amount. Under the False Claims Act, the government can obtain up to three times the damages, and often seeks up to two times the designated restitution amount in negotiated settlements. This settlement indicates that the government likely viewed the defendant as being cooperative in its investigation.