Federal Court Applies Jarkesy to Administrative False Claims Act, Vacates $735,000 HUD Award

A recent federal district court decision raises questions about the government’s ability to pursue false claims administratively under the recently expanded Administrative False Claims Act (“AFCA”). In Smith v. United States Department of Housing & Urban Development, 2026 WL 3251707, No. 1:25-cv-00016 (D. Guam Oct. 29, 2026), the District Court of Guam held that the Seventh Amendment entitled the respondent to a jury trial before the government could impose civil penalties and assessments under the statute. The court therefore vacated a $735,372 administrative award entered by the Department of Housing and Urban Development (“HUD”).

The decision applies the Supreme Court’s 2024 decision in Securities and Exchange Commission v. Jarkesy, 603 U.S. 109 (2024), which addressed the constitutional limits on an agency’s ability to adjudicate fraud claims and impose civil penalties through an administrative proceeding. Although Smith is a single district court decision and arose outside the traditional procurement context, its reasoning could have broader implications for agencies seeking to use the AFCA against federal contractors and others that receive federal funds.

What Is the Administrative False Claims Act?

The statute at issue in Smith, formerly known as the Program Fraud Civil Remedies Act (“PFCRA”) and now called the Administrative False Claims Act (“AFCA”), provides the government with an administrative mechanism for pursuing relatively small false claims and false statements. The AFCA is intended to address smaller dollar fraud cases for which the cost of conventional litigation could exceed the government’s potential recovery.

Unlike a traditional civil False Claims Act (“FCA”) case litigated in federal district court, an AFCA matter proceeds through the affected agency. The agency designates an investigating official, typically its Inspector General, who investigates possible violations and has authority to subpoena documents. The investigating official transmits the findings to a reviewing official within the agency, who independently evaluates whether there is adequate evidence of a false claim or statement. The matter is then referred to the Department of Justice (“DOJ”), and the agency may commence administrative proceedings only with DOJ approval.

Like the FCA, the AFCA does not require proof of a specific intent to defraud. Actual or constructive knowledge of falsity is sufficient. The statute also authorizes civil penalties for false claims and statements as well as an assessment tied to the amount of a false claim that the government has paid.

Historically, the government made relatively limited use of the AFCA against government contractors. Congress recently sought to give the administrative enforcement mechanism considerably more reach. Congress subsequently amended the statute through the FY 2025 NDAA, renaming it the AFCA and increasing the maximum amount associated with an individual claim from $150,000 to $1 million. Those amendments did not apply to the proceedings against Smith, but the expansion provides important context for the court’s decision.

Just as Congress has substantially increased the potential reach of administrative false claims enforcement, the court held that the Seventh Amendment constrains the government’s ability to use that process to impose monetary penalties and assessments without a jury.

The Smith Decision

Smith served as legal counsel to the Guam Housing and Urban Renewal Authority (“GHURA”), Guam’s public housing agency, while also owning rental properties participating in HUD’s Section 8 Housing Choice Voucher Program. HUD concluded that Smith’s financial interests in those properties created a prohibited conflict of interest.

The HUD administrative proceeding concerned 25 housing assistance payments. The agency found that Smith directly received five payments totaling $48,140 while serving as GHURA’s legal counsel and later indirectly received another 20 payments totaling $218,296 through an arrangement involving another party. A HUD administrative law judge found Smith liable for 25 false claims under PFCRA and imposed $532,872 in assessments and $202,500 in civil penalties, for a total of $735,372.

On judicial review, the district court did not simply reject HUD’s factual case. To the contrary, HUD prevailed on several of the underlying issues. Among other things, the court upheld the agency’s findings that Smith was a covered individual for purposes of the applicable conflict of interest restriction and that his misrepresentations were material. The constitutional issue nevertheless required the administrative award to be vacated.

The District Court Applies Jarkesy

The central issue was whether Jarkesy precluded HUD from adjudicating the PFCRA claims administratively and imposing monetary penalties and assessments without affording Smith a jury trial. The court concluded that it did. Under Jarkesy, the Seventh Amendment applies when the government seeks a legal remedy on a claim that implicates the type of rights traditionally adjudicated at common law. Applying that framework, the Smith court focused both on the nature of PFCRA’s monetary remedies and on the similarities between PFCRA liability and traditional fraud.

First, the court concluded that PFCRA penalties and assessments are legal rather than equitable remedies. The court focused on the punitive and deterrent purposes of the monetary relief, including regulatory factors addressing the respondent’s culpability, history of prior offenses, the government’s investigative costs, the intangible costs of fraud and the need for deterrence.

Second, the court concluded that a PFCRA action bears a sufficiently close relationship to common law fraud. Both concern false representations or concealment of material facts, and both impose liability based on conduct traditionally associated with fraud. The differences between the statutory cause of action and the precise elements of common law fraud were not enough to alter the court’s conclusion.

The court also rejected HUD’s argument that PFCRA claims fall within the “public rights” exception to the Seventh Amendment. Applying Jarkesy, the court concluded that Congress could not avoid the jury trial requirement simply by assigning adjudication of a traditional legal claim to an administrative tribunal. The court ultimately concluded that “the PFCRA’s civil penalty and assessment provisions [are] unconstitutional as they violate the Seventh Amendment rights of any respondent.” It therefore vacated HUD’s administrative orders, including the $735,372 monetary award.

Why the Decision Matters for Government Contractors

The timing of Smith makes the decision particularly noteworthy for government contractors. Congress recently expanded the dollar amount of claims subject to administrative enforcement from $150,000 to $1 million. That change substantially increases the universe of claims the government potentially can pursue through an administrative proceeding rather than conventional FCA litigation in federal court.

Smith now raises a threshold constitutional question about that expanded enforcement authority - when an agency seeks punitive monetary relief for allegedly false claims, can the agency adjudicate those claims through its own administrative process without providing the respondent a jury trial? The District Court of Guam’s answer is no.

The decision also is notable because the court distinguished Millennia Housing Management v. U.S. Department of Housing & Urban Development, 783 F. Supp. 3d 1051 (N.D. Ohio 2025), which rejected a Jarkesy challenge to a different HUD administrative penalty statute. Among other distinctions, the Smith court noted that the statute at issue in Millennia made the imposition of civil monetary penalties permissive, while the court construed PFCRA to require monetary penalties and assessments once administrative liability was established.

That distinction may prove important as courts consider Jarkesy challenges to other administrative enforcement regimes. Smith does not hold that agencies are constitutionally prohibited from adjudicating regulatory violations. Rather, the problem identified by the court arises when an agency adjudicates a claim analogous to a traditional common law cause of action and seeks monetary relief that is legal and punitive in nature.

Takeaways

For federal contractors and grant recipients, Smith is significant for several reasons.

First, the decision identifies a potentially significant constitutional challenge when an agency elects to pursue alleged false claims through the AFCA administrative process. Importantly, the defense concerns who may adjudicate the government’s claim and impose the monetary remedy, not necessarily whether the underlying conduct can give rise to liability. Smith illustrates that distinction particularly well because the court upheld several of HUD’s substantive findings while still vacating the resulting administrative award.

Second, the decision could complicate agencies’ use of the newly expanded AFCA. Congress has now made claims of up to $1 million potentially subject to the administrative process. If other courts adopt Smith’s application of Jarkesy, agencies may face a substantial constitutional obstacle when attempting to use that authority to impose penalties and assessments through administrative adjudication.

Third, the decision should not be overstated. Smith is a district court decision from the District of Guam. It does not establish a nationwide rule invalidating the AFCA, nor does it foreclose the government from pursuing false claims through other available enforcement mechanisms.

Smith is nevertheless an important early application of Jarkesy to the government’s administrative false claims regime. And it comes at a significant time. Congress has recently expanded the reach of that regime from claims of $150,000 to claims of up to $1 million. If other courts follow Smith, agencies may face a meaningful constitutional limitation on a fraud enforcement tool that Congress has only recently sought to strengthen.