Inflated Prices at Military Commissaries Provides Potential Basis for False Claims Act Liability

Contractual agreements with the U.S. military for goods provided in commissaries and exchanges can provide funding designed to ultimately benefit military families. The Morale, Welfare and Recreation (“MWR”) Fund, for example, is a comprehensive network of services that provides support, family child care, and discounted recreation to military personnel and their families. MWR derives part of its funding from tobacco profits from cigarettes sold at military exchanges. Any inflation of those prices would, in turn, have the effect of diminishing funding for the programs and services provided by the MWR.

In a complaint filed in 2008 on behalf of the government by whistleblower Anthony Oliver, CEO of tobacco company Medallion Brands International, it was alleged that Philip Morris USA violated the False Claims Act by selling its cigarettes to the military at prices significantly higher than what others were charged. Oliver specifically alleged that, despite the inclusion of a “most favored customer” clause guaranteeing the best price in its agreements with U.S. Army, U.S. Navy, and U.S. Air Force exchanges, Philip Morris actually charged more than what was paid by affiliates purchasing the same products or foreign purchasers of the same products. Philip Morris did not deny the charging of higher prices but defended on the basis of the cost of maintaining the Surgeon General’s Warning on the packaging.

The case was recently dismissed in part because the federal trial court found that Oliver was not the original source of the information as required by the False Claims Act. Because of the dismissal, no ruling was made regarding the alleged violations of the Act. Government contracts between private corporations and the federal government account for hundreds of billions of dollars in spending each year and the False Claims Act provides an incentive to private citizens with inside information to alert the government of fraud in such contracts. A successful suit can result in an award of 15% to 30% of any final judgment or settlement to the whistleblower. In addition, recent amendments to the Act provide increased protection against employer retaliation for those who take steps to report or stop fraud.