High Tech to the Pentagon: Take a Number and Stand in Line

Thursday, July 30, 1998

For many years, our military’s strategy has been based on battlefield dominance through our leadership in technology, especially information technology. During the 1950s, 1960s, and 1970s, the Defense Department was the principal supporter of research and development for the computer, communications, and semiconductor industries. Some of the most significant advances were developed first for military systems. In effect, our nation’s commercial industry was riding on the shoulders of the Defense Department. But the Defense Department’s role in developing technology has changed, and today, that situation has been reversed. The technological explosion has led to a set of amazing new products for industry, businesses, schools, and the home. Commercial applications of computers are leading military applications in all of these fields, and, for computer companies, commercial revenues dwarf Defense Department revenues. Today, the Defense Department must ride on the shoulders of our commercial industry.

Defense can no longer support a unique defense industry but must increasingly rely on commercial companies and commercial products. To attract and retain those companies as suppliers, the Defense Department must give up its unique buying practices and employ the best commercial practices. That is why acquisition reform was a primary goal of mine when I became defense secretary four years ago.

Reform is off to a good start, but we must eliminate unnecessary barriers to commercial companies and their technology. Secretary William Cohen has put even more energy into the efforts to reduce unneeded overhead. One example of needed change is the Civil False Claims Act. Although it is intended to protect the government against fraud, the statute has been used to apply pressure in nonfraudulent contract disputes. Despite the extraordinarily large penalties and damages that it provides, the statute was amended in 1986 to significantly reduce the amount and quality of evidence required for prosecution and to eliminate the need to prove intent to defraud. Simple mistakes by a commercial supplier that would, at most, support an ordinary contract dispute in the commercial world have become allegations of fraud when the same goods or services are sold to the government.

The cost of investigating and defending false claim cases, both in personnel time and money to pay lawyers, often runs into millions of dollars. The magnitude of these costs, together with the disruption in business and possible suspension from further government sales, causes most contractors to settle cases even when they believe they could prevail in a trial. Contractors who sell primarily to the government have no practical choice other than to accept the risk, but commercial suppliers are likely to refuse to sell to avoid the exposure.

For decades, our nation’s commercial industry rode on the shoulders of the Defense Department, benefiting from consumer applications of military technology. Today the situation is reversed.

A recent study by the National Economic Research Associates called the statute “imbalanced” in that its penalties are disproportionately high, given the knowledge standard and burden of proof. This significantly raises the risk of a huge, though erroneous, award.

The hidden costs of the extraordinary burdens of the False Claims Act are simply intolerable. Although the government needs strong statutory mechanisms for combating fraud, these statutes should address conduct that is intentionally fraudulent and should not be utilized coercively in a contract dispute. The government already has alternative remedies that are adequate to protect its contract rights; the False Claims Act should be modified to be consistent with commercial contracting practices.