BLOG: Small Businesses and the FCA: Are More FCA Cases Against Small Businesses on the Horizon?

September 19, 2019

By Timothy F. Valley
Practice Areas: False Claims Act, Government Contracts Law, Litigation & Dispute Resolution and Small Business Programs & Advisory Services

On August 20, 2019, the U.S. Department of Justice announced that it had reached a $20 million settlement with Luke Hillier (Hillier), the majority owner and former CEO of a Virginia-based defense contractor, ADS, Inc. (ADS), to resolve “allegations that he violated the False Claims Act (FCA) by fraudulently obtaining federal set-aside contracts reserved for small businesses that his company was ineligible to receive . . . .” The resolution of the claims against Hillier follows ADS’s payment of a separate $16 million settlement on related claims, as well as an additional $225,000 paid by Charles Salle, the former general counsel of ADS, to resolve claims arising from his role in the alleged scheme. Combined, the $36 million total settlement is believed to be the largest FCA recovery in history based on allegations of small business contracting fraud. Given the size of the collective settlement and the nature of the allegations against Hillier and ADS, small businesses everywhere—particularly government contractors—should anticipate a potential increase in the frequency of small business fraud-related FCA cases.

The case from which these settlements arose was originally filed in November 2013 and alleged that ADS caused its affiliates to falsely represent themselves as, among other things, Service-Disabled Veteran Owned Small Businesses (SDVOSBs). It further alleged that these false representations allowed ADS, through its affiliates, to compete improperly for set-aside opportunities that were intended to be available only to SDVOSBs and for which ADS was not eligible. As a result of this improper access, ADS profited at the expense of both the government and eligible SDVOSBs. The claims against ADS were settled in August 2017; however, the claims against Hillier remained outstanding until last month.

To be eligible for any small business set-asides, including SDVOSB set-asides, businesses must satisfy certain eligibility requirements, established primarily by the U.S. Small Business Administration (SBA). The specific requirements depend on the type of set-aside. For example, in order to self-certify as an SDVOSB, and therefore compete for SDVOSB set-aside contracts, a company must be owned and controlled by a service-disabled veteran, and must qualify as a small business under the applicable NAICS code, among various other requirements. Businesses must represent and certify as to their size and status (e.g., as a veteran-owned small business, women-owned small business, or SDVOSB, for example) when responding to set-aside contracting opportunities, as well as in their System for Award Management (SAM) registration. If a business knows that, or acts with reckless disregard or willful ignorance as to whether, it is not a small business of the type for which the contract was set-aside but represents otherwise, it exposes itself to potential FCA liability and monetary fines, among other penalties such as suspension and debarment. Likewise, the officers of the business may be liable individually under the FCA for any involvement in the business’ false representations or certifications. This potential individual liability is the basis of Hillier’s settlement last month.

The lesson to be drawn from these settlements is simple: the government will prosecute small businesses that falsely represent their socio-economic and size statuses. Contractors should be forthright with their dealings with the government and should understand the serious implications that flow from a misrepresentation. Indeed, as exemplified above, the government has shown that it will pursue false representations zealously and that the cost to contractors of making such representations can be steep. Simply put, contractors should be sure that all their size and status representations are accurate.

Members of PilieroMazza’s False Claims ActLitigation & Dispute Resolution, and Small Business Programs & Advisory Services practice groups are well-equipped to advise small businesses and government contractors on these and other issues.

Timothy Valley, the author of this blog, is an Associate in the Firm’s Government Contracts LawLitigation & Dispute Resolution, and Small Business Programs & Advisory Services practice groups.

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