Imagine this scenario. Your small business that is eligible for set-asides and incentives under the state or federal government’s disadvantaged business programs (such as Disadvantaged Business Enterprise (DBE), Service-Disabled Veteran-Owned Business (SDVOSB), Women-Owned Small Business (WOSB), Section 8(a), HUBZone), has just been contacted by a major player in your industry with an exciting offer. They want you to partner with them in pursuing a large government contract because there is either a required portion of the work that has been set-aside to be completed by a business like yours, or it may be a competitive advantage for the major player in bidding. You are intrigued by the prospect of playing a significant role in a major project, so you jump at the chance to sign up as this bidder’s small-business subcontractor. Lo and behold, your bidder ends up winning the prime contract.
Often such deals work out wonderfully and are a success story all around. However, sometimes the relationship unexpectedly changes. Your portion of the job may be decreased well below what was originally promised. You may find yourself in the dark trying to figure out what the scope of work is, getting answers to questions, or determining the expectations of the prime contractor and client. Perhaps you simply raised a concern and were then frozen out, or worse, terminated for no good reason. Maybe you are just weathering the storm, wondering what to do next.
Now, you have the feeling that this was just a set-up from the start. The prime contractor used you to win the bid by promising to let you do a significant chunk of the work, but then set you up for failure, took your scope away, or worse.
What Can You Do When a Prime Contractor Promises but Fails to Subcontract a Fair Share of the Work to a Small Business?
One option you may want to consider is filing a special whistleblower lawsuit under the False Claims Act (FCA) or the state equivalent. The FCA and many states allow private parties called “relators” to file a lawsuit on behalf of the United States or state governments through a qui tam complaint. Basically, you (as a relator) act sort of like a private government agent uncovering fraudulent contracting schemes involving government money.
The process starts when you file a qui tam complaint under seal (i.e., non-publicly). Then, a waiting period passes during which the local U.S. Attorney’s Office or State Attorney General’s Office will investigate and decide whether they want to intervene (in other words, become formally involved in the lawsuit) or let you continue with it alone. Either way, the case is eventually unsealed (made public record), the defendant you are suing on behalf of the government gets served with a copy of the complaint, and the case progresses. In both situations, you are also entitled to a portion of whatever damages are ultimately obtained from the wrongdoer if the lawsuit is successful. This reward functions sort of like a finder’s fee for uncovering and prosecuting fraud against your own country.
Qui tam actions are powerful weapons in the fight against corruption in government contracting. In the words of one court, “Congress has let loose a posse of ad hoc deputies to uncover and prosecute frauds against the government.” See U.S. ex rel. Milam v. Univ. of Texas M.D. Anderson Cancer Ctr., 961 F.2d 46, 49 (4th Cir. 1992). Wouldn’t you want to join this “posse” when there is a potential monetary reward at the end of the road for turning in your prime contractor for its deceptive promise that it would let your business perform a significant amount of work on the project?
But There’s a Catch
Unfortunately, signing up as an ad hoc deputy in Congress’ posse of fraud busters may not be quite so simple for small businesses as two recent cases demonstrate.
In United States ex rel. Howard v. Caddell Constr. Co., Inc., No. 7:11-CV-270-FL, 2021 WL 1206584 (E.D.N.C. Mar. 30, 2021), the relator (i.e., a whistleblower) alleged a prime contractor on a large construction contract was involved and/or complicit in a complex scheme of setting up a shell disadvantaged small business solely for the purposes of passing nearly all of its subcontracted work through to a far larger and non-disadvantaged firm. The relator further alleged five other small-disadvantaged businesses were supposed to do significant portions of the subcontract work on the project, but those five businesses promptly re-subcontracted the vast bulk of that work to other bigger subcontractors. Hence, the U.S. Government was bamboozled into thinking a large portion of the work was being done by at least six disadvantaged small businesses, when, in reality, nearly all the work assigned to those small businesses was done by big sub-subcontractors. That doesn’t sound very honest, does it?
Yet, the federal trial judge in North Carolina dismissed the allegations. Among other things, the judge ruled any false statements about how much work was being done by small-disadvantaged subcontractor firms didn’t appear to be “material” (i.e., important) to the government’s decision to pay the prime contractor for the work. From the allegations in the qui tam complaint, the judge reasoned the question of whether small-disadvantaged subcontractors were doing the amount of work reported to the government was not a core and basic requirement of the contract that could have influenced the government’s decision to pay the prime contractor. In a nutshell, even if the prime contractor did lie to the government about how much work was done by small-disadvantaged businesses, and the government knew this, the government ultimately did not care enough about the requirement to withhold payment. Therefore, the government was not defrauded by that falsity.
In United States ex rel. PCA Integrity Assocs., LLP v. NCO Fin. Sys., Inc., No. CV 15-750 (RC), 2020 WL 686009 (D.D.C. Feb. 11, 2020), the relator alleged a group of prime contractors (firms performing debt-collection services for a government agency) had represented to the government while bidding for their prime contracts that some work would be performed by small-business subcontractors. The government awarded the prime contractors' incentive points on their proposals as a reward for using small-business subcontractors. However, according to the relator, those supposed small-business subcontractors were not small businesses at all under applicable government regulations, as they were affiliated with (i.e., owned or controlled by) larger subcontractors. Despite this allegation, the federal trial judge in Washington D.C. dismissed the case. In part, the court reasoned the relator had not pled enough specific facts showing what each prime contractor had represented to the government, why that representation convinced the government to award incentive points on each proposal, and how many points were ultimately awarded. In other words, the court found the scheme the relator had uncovered, even if true, was not pled in sufficient detail.
Does that Mean I’m Out of Luck?
Not if you do your homework.
First, some of the factual problems in the cases above can be avoided if you and your trusted law firm file your own whistleblower qui tam. You can spend time researching, taking notes on conversations with the prime contractor’s people, asking questions, etc. to help build up as much evidence as possible before filing a lawsuit. If you have information answering the “who, what, when, where, and why” questions the judge will likely ask when reading your allegation, your chances of success will likely be higher. For example, ask your prime contractor for a copy of its contract with the government agency to see exactly how much of the work it promised the government you would perform. If the prime contractor refuses, you may be able to request a copy through a Federal Freedom of Information Act (FOIA) or state public records act. You may also ask for copies of any periodic reports submitted by the prime contractor that certify and/or update the agency on small contractor participation in the project.
Second, the relators in both cases above chose to proceed, at least in part, under an “implied false certification theory.” This means they argued the prime contractors failed to alert the government that their small-business subcontractors were doing less work than originally planned, and simply allowed the government to proceed under the wrong impression that the small subcontractors were getting their full allotment of work as specified in the original proposal. In other words, there was no positive showing of deliberate deceit, just negligence in reporting. This “impliedly false” statements theory looks like a harder hill to climb than some other theories of FCA liability because it is based only on an inference from lack of action.
In contrast, under a “fraud-in-the-inducement” theory, the relator could allege (1) the prime contractor did, in fact, falsely state that its small-business subcontractor would do a significant amount of work on the project but (2) secretly knew it had absolutely no intention of letting the small subcontractor do the work after the award. This is just one example. There may be other possible theories to consider under the specific facts of your contract and your prime contractor’s actions. The point is that you and your legal team should look at all options before picking method(s) to pursue.
In short, you may be able to blow the whistle on a prime contractor’s scheme to get a big government project by promising you work but then switching it to someone else. An FCA qui tam lawsuit is not a one-size fits all solution, but it is a powerful tool when applied under the proper facts and with advantageous legal pleading.
If you have questions about the False Claims Act or are thinking about blowing the whistle on a prime contractor’s misconduct, contact us. Whitcomb, Selinsky, PC has a team of experienced government contracting attorneys ready to help.