Businesses That Misrepresent Their “Special Status” Eligibility for Contract or Grant Preferences Can Be Liable Under the False Claims Act

By Susan Schneider Thomas

“The Congress has established a number of statutory goals designed to help small businesses compete for Federal contracts. In addition to the goal of awarding at least 23 percent of all Federal prime contracting dollars to small businesses, the Congress also established Government-wide contracting goals for participation by small businesses that are located in Historically Underutilized Business Zones (at least 3 percent) or that are owned by women (at least 5 percent), socially and economically disadvantaged individuals (at least 5 percent), and service-disabled veterans (at least 3 percent)[all of the listed percentages are percentages of federal contracting dollars].  These aspirational goals help ensure that all Americans share in the jobs and opportunities created by Federal procurement.”

Presidential Memorandum on the Interagency Task Force on Federal Contracting Opportunities for Small Businesses, April 26, 2010.

Consistent with these goals, companies can apply for grants or contracts under preferential terms or can sometimes become eligible for single-source (or non-competitive) contracts based on their status of being majority owned by women, disadvantaged individuals, or veterans who became disabled as a result of service injuries.  Additionally, under the HUBZone program, there is special eligibility for small businesses that are located in Historically Underutilized Business Zones.  Where an individual observes or learns that a company has lied about its eligibility status and been awarded a contract or grant based on that misrepresentation, the individual can initiate a lawsuit under the False Claims Act (FCA) to recover the loss suffered by the United States on account of the misrepresentations.

Historically Underutilized Business Zones Program

Consider the HUBZone program, for example. Congress established the Historically Underutilized Business Zones (HUBZone) program in 1997 to help inner cities and rural counties that have low median household income and above-average unemployment rates, and whose communities have suffered from a lack of investment. Small businesses that maintain their principal office in a designated HUBZone and meet other specific requirements can become certified by the Small Business Administration (SBA) as HUBZone companies. HUBZone companies can then use this certification to their advantage when bidding on government contracts.  The requirements encompass being a small business, being majority owned by US citizens or Native American tribe members, having the principal place of work in a designated HUBZone, and having at least 35% of the total workforce live within a HUBZone.

Most federal agencies are expected to try to meet the overall targets, although there are no punitive consequences for not meeting the small business procurement contracting goals. Through public attention and Congressional scrutiny, the government attempts to secure compliance.   For example, agency performance is often cited by Members during their questioning of federal agency witnesses during Congressional hearings.  Despite these efforts, and considerable programmatic resources put into the contracting efforts, as measured in 2013, federal agencies collectively met the federal contracting goal for small disadvantaged businesses, but not the other goals. Federal agencies awarded 22.24% of the value of their small business eligible contracts to small businesses, 8.00% to small disadvantaged businesses, 4.00% to women-owned small businesses, 2.01% to HUBZone small businesses, and 3.03% to service-disabled veteran-owned small businesses. See Small Business Administration HUBZone Program, Dec 17, 2013, Congressional Research Service.

HUBZone Misrepresentations

Of particular interest to individuals and lawyers considering potential FCA actions, the SBA provides that lies or misrepresentations of HUBZone eligibility in connection with any contract, grant or other award of government business result in a presumption that the total amount expended on any such business will be considered the loss to the government.[1]

Although there was judicial precedent for assessing damages in that manner, see, e.g., United States ex rel. Longhi v. Lithium Power Techs., Inc., 530 F. Supp. 2d 888 (S.D. Tex. 2008); aff’d, 575 F.3d 458 (5th Cir. 2009) (assessing damages resulting from four contracts obtained by fraud in the inducement, and finding that the government received no “benefit of the bargain”); U.S. ex rel. Feldman v. Wilfred Van Gorp and Cornell Univ. Med. College, 2010 U.S. Dist. Lexis 47039 (S.D.N.Y. 2010), it remained an open matter in various courts and under different circumstances.  Damages could be assigned based on a benefit of the bargain theory, or as the difference between what the government contracted for and what it received (which might be nothing if the contract was fully performed in accordance with its specs – other than the HUBZone participant requirement), Ab-Tech Construction v. United States, 31 Fed. Cl. 429 (Fed. Cl. 1994), aff’d., 57 F.3d 1084 (Fed. Cir. 1995); United States ex. rel. Harrison v. Westinghouse Savannah River Co., 352 F.3d 908 (4th Cir. 2003); United States ex. rel. Stebner v. Steward & Stevenson, 305 F.Supp. 2d 694, 701 (S.D. Tex Jan. 30, 2004), or as some measure of the government’s programmatic loss caused by not having the work flow to the specific eligibility contractor.

The differences in the calculation of damages can be enormous, of course, and often dictate whether anyone deems the initial status misrepresentation as even being worth pursuing through litigation. Determining that the total amount expended on the government business – essentially, the total value of the contract or grant — is deemed the loss to the government is the most aggressive stance that could be taken.  Here, through this regulation, the SBA comes close to that line, in terms of potential damages, but it only establishes a presumption of such loss based on the total amount expended.  There is some elaboration of what the presumption is based on, although virtually nothing about what would be a sufficient quantum of contrary evidence to rebut the presumption.  The regulation itself provides that it does not apply in case of unintentional errors or similar malfunctions that indicate the misrepresentation was not willful or intentional, 13 C.F.R. § 126.900(d) and, of course, the FCA itself requires some degree of knowing conduct for liability to attach.  31 USC 3729.  The regulation also provides some shelter to prime contractors who are misled by subcontractors, although there will be an inquiry into the efforts the prime contractor took to insure compliance and legitimate eligibility by the sub.  Basically, common sense factors that indicate a lack of deliberate effort to defraud and some good faith measures to protect against fraudulent conduct by others will provide protection to the accused company.  13 C.F.R. § 126.900(d).  Aside from the regulatory provisions, there is virtually no case law fleshing out the nature of the presumption or what would be required to rebut it.  But the presumption that a misrepresentation about a business’ eligibility under HUBZone will lead to damages measured as the total value of the contract or grant provides strong incentive for people to file lawsuits to recover those damages.

HUBZone Lawsuits and Investigations

According to a string of federal investigations and assessments over the past ten years, there is plenty of fraud to fuel such lawsuits.  Investigations by the Government Accountability Office, Office of Inspector General of the SBA and other federal oversight agencies have pointed to widespread fraud and abuse in the HUBZone and other set-aside programs, and inadequate resources or political will to rein it in.  See, e.g., GAO, Small Business Contracting: Opportunities Exist to Further Improve HUBZone Oversight, GAO-15-234, (Washington, D.C.: Feb. 12, 2015); GAO, HUBZone Program:  Actions Taken on February 2015 GAO RecommendationsQuestionable Acquisitions: Problematic IT Contracting At The IRS, Staff Report Committee On Oversight And Government Reform, U.S. House Of Representatives, 2013, (revealing violations of HUBZone, small business, service-injured veteran and other programs, leading to over $500 million of IRS contracts)[2];  Kate M. Manuel & Erika K. Lunder, Cong. Research Serv., Set-Asides for Small Business: Legal Requirements & Issues, CRS No. R42981, Feb. 28, 2012, at 4-5; U.S. Gov’t Accountability Office, Small Business Admin.: Undercover Tests Show HUBZone Program Remains Vulnerable to Fraud & Abuse, GAO-10-759, June 2010; U.S. Gov’t Accountability Office, 8(a) Program: Fourteen Ineligible Firms Received $325 Million in SoleSource & Set-Aside Contracts, GAO-10-425, Mar. 30, 2010; HUBZONE PROGRAM: Fraud and Abuse Identified in Four Metropolitan Areas, GAO-09-440: Mar 25, 2009.  In the last few years, there have also been some substantial settlements reached with companies accused of violating the HUBZone or other special eligibility programs.   E.g., https://www.justice.gov/usao-ndoh/pr/canton-man-sentenced-prison-ordered-repay-67-million-fraud-getting-federal-contracts, Sept 15, 2015 (sentence of one year in prison and $6.7 million restitution for wire fraud by misrepresenting company’s office location to qualify for HUBZone certification); Press Release, Office of Pub. Affairs, U.S. Dep’t of Justice, Gilbane Building Company to Pay $1.1 Million to Resolve False Claims Allegations (Mar. 18, 2015), (misrepresenting disabled veteran status); Press Release, Office of Pub. Affairs, U.S. Dep’t of Justice, LB&B Associates Inc. Agrees to Pay $7.8 Million for Alleged False Claims Related to Small Business Administration Set Aside Contracts (July 6, 2015), (false representation of eligibility for set-aside contracts for socially and economically disadvantaged persons under SBA 8(a) program); Press Release, Office of Pub. Affairs, U.S. Dep’t of Justice, Manhattan U.S. Attorney Files And Settles Civil Fraud Lawsuit Against UFC Aerospace And Douglas B. Davis For Engaging In Fraudulent Conduct In Violation Of The Small Business Act (Oct. 8, 2015), (false representations of status as women-owned small business).  See also U.S. ex. rel. Scollick v. Narula, 14-CV-01339-RCL, 2016 WL 6078246, at *13 (D.D.C. Oct. 17, 2016)(allegations that company was a front for purposes of allowing bidding on SDVOSB set-aside contracts and falsely identifying company as operating out of a HUBZone).

Especially with the very favorable regulation governing the extent of damages, these lawsuits have the potential to impose substantial costs on the offending companies, and handsome rewards to the courageous folks who blow the whistle!

[1]   13 C.F.R. § 126.900(a) provides as follows:

Presumption of Loss Based on the Total Amount Expended. In every contract, subcontract, cooperative agreement, cooperative research and development agreement, or grant which is set aside, reserved, or otherwise classified as intended for award to HUBZone SBCs, there shall be a presumption of loss to the United States based on the total amount expended on the contract, subcontract, cooperative agreement, cooperative research and development agreement, or grant whenever it is established that a business concern other than a HUBZone SBC willfully sought and received the award by misrepresentation.  This was first enacted as part of the Small Business Jobs Act of 2010, Pub. L. No. 111-240 §1311-1347 (September 27, 2010).

[2] Among other colorful evidence of fraud, Strong Castle received service-disabled, veteran-owned small business certification based on an injury to the corporate principal’s left foot, sustained in 1984 while he was enrolled at the U.S. Military Academy Preparatory School, which he attended for a single school year as a “redshirt” football player. That one year at USMAPS represented his only connection to military service. Moreover, documents and testimony provided to the House Committee on Oversight and Government Reform raised questions about the extent of the injury since the individual graduated from USMAPS and eventually attended the University of San Diego, where he played quarterback and linebacker on the football team. Questionable Acquisitions: Problematic IT Contracting At The IRS, Staff Report Committee On Oversight And Government Reform, U.S. House Of Representatives, 2013,  http://oversight.house.gov/wp-content/uploads/2013/06/Strong-Castle-IRS-Final-Report.pdf

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By | 2018-03-27T02:19:42+00:00 November 15th, 2016|Contractor Fraud|