Recent Developments in the Law

A July 1996 Court of Appeals decision, City and County of San Francisco v. Stacey & Witbeck and Nationwide, 47 Cal. App. 4th 1, 54 Cal. Rptr. 2d 530 (1996) held that the litigation privilege does not apply to protect statements made in the contract claim submission process. In that case, Stacey & Witbeck was a contractor to the City of San Francisco on a Muni project. Stacey & Witbeck was encouraged by the City engineering staff to submit documentation in support of its claims, in anticipation of settlement discussions. Stacey & Witbeck submitted the documentation, the claims were denied, and the contractor filed litigation. The City contended that the claims submitted were false, and filed a cross-complaint against the contractor alleging violation of the False Claims Act and seeking treble damages and other penalties. Stacey & Witbeck sought dismissal of the cross-complaint on the grounds that the claims submission process was undertaken in anticipation of litigation, and was therefore privileged. The Court of Appeal disagreed, holding that, while one purpose of the contract claims submission was anticipation of litigation, the litigation privilege did not apply because there was an independent purpose, i.e. Stacey & Witbeck's compliance with the contract requirements. The effect of this case was to strip the contractor from immunity for False Claim liability for statements and claims made in the course of a contractual claims submission procedure.

Effective January 1, 1997, the California Legislature has gone even further. In a piece of legislation that drew little scrutiny until its passage, Assembly Bill 2678 (Figueroa) amended the False Claims Act to provide that the litigation privilege does not apply to any claim subject to the False Claims Act. (Government Code Section 12654(e)). In other words, not only are claims and statements made during the contract claim review process not privileged, but claims and statements made in litigation or arbitration are also not privileged. Under this new law, a contractor can be subject to false claim liability for statements made in pleadings, pre-trial discovery, and trial testimony.

Contractor groups fear that this amendment to the False Claim Act increases the potential for abuse, as public entities could use the Act to "beat down" contractors with legitimate claims. Even if the contractor ultimately proves the validity of the claim, the costs of addressing the false claim accusation can be staggering. The Associated General Contractors of California is considering remedial legislation, but for now the amended law remains in effect.

As a result of the Stacey & Witbeck case and the recent legislative change, contractors can expect to see false claims accusations made with renewed vigor. The potential exists for any disputed claim to be characterized as a false claim, upping the ante for contractors seeking additional compensation from public entities.