The U.S. Court of Federal Claims (“COFC”) recently issued an opinion that should give pause to contractors who seek to bring suit against the U.S. government but have not complied with materially relevant government regulations. In LW Construction of Charleston, LLC v. U.S., a government contractor filed suit against the Department of Veterans Affairs (“VA”), alleging that its contract for a construction project at Fort Jackson National Cemetery was wrongfully terminated. The procurement under which LW Construction of Charleston (“LW”) had been awarded the contract had been set aside for service-disabled veteran-owned small businesses (“SDVOSB”). Three years after LW filed suit, the government brought counterclaims alleging that LW was not an eligible SDVOSB.

A few months prior to LW bringing suit against the VA, in February 2014, LW’s subcontractor filed suit against it for failure to pay the balance on the subcontract. In May 2014, the subcontractor’s principals also filed a qui tam action against LW and other companies and individuals that they alleged had conspired with LW to establish a company to fraudulently obtain SDVOSB status and fraudulently enter into the Fort Jackson contract, among other contracts. In August 2014, the government conducted an investigation of the subcontractor’s allegations and declined to intervene in the subcontractor’s qui tam action, concluding that the subcontractor had brought the qui tam action in an effort to obtain leverage in its suit for payment on the subcontract. Nonetheless, sometime in 2014, the U.S. Department of Justice began a criminal investigation into LW.

In October 2014, LW filed its lawsuit against the VA for terminating its contract for default due to project schedule and performance deficiencies. Three years later, in October 2017, the government filed a motion for leave to amend its answer to the complaint to assert counterclaims for False Claims Act (“FCA”) violations, common law fraud and unjust enrichment. This was after the government had consented to the voluntary dismissal of the subcontractor’s qui tam action in August 2015.

LW argued that the court should deny the government’s request for leave to amend its answer because the government’s proposed counterclaims would be futile. In October 2011, the VA’s Center for Veterans Enterprise had determined that LW was not an eligible SDVOSB because the service-disabled veteran did not have full control of the company. LW alleged that, after it was decertified as a SDVOSB, the VA directed LW to continue performing on the Fort Jackson contract and continued to pay LW, despite having actual knowledge that LW’s SDVOSB status had been revoked. Therefore, LW argued that the VA could not meet the materiality requirement established in Universal Health Services, Inc. v. United States ex rel. Escobar, in which the U.S. Supreme Court held that, if the government pays a particular claim, despite having actual knowledge that certain requirements were violated, it is strong evidence that those requirements are not material under the FCA.

However, according to applicable regulations, while a contractor must be an SDVOSB at the time it submits its proposal for a contract set aside for such businesses, a change in status does not necessarily impact a company’s ability to continue performing on a previously awarded contract. Thus, the government argued that the proper question was whether LW’s assertion that it was an SDVOSB was material to the award of the contract, not whether the VA knew that LW’s SDVOSB status was later revoked, still had LW perform on the contract, and continued to pay LW.

COFC held that since the VA had restricted competition for the Fort Jackson contract to eligible SDVOSBs, the VA would not have considered LW’s proposal but for LW’s representation that it was an SDVOSB. Therefore, the court held that the VA had sufficiently alleged materiality. Thus, the court granted the government’s motion for leave to amend in part, limiting the FCA counterclaim to claims for payment that LW had submitted within six years prior to the date the government sought leave to amend, pursuant to the FCA’s statute of limitations.

This opinion stands as a cautionary tale to contractors who desire to file suit against the government to ensure that they have complied with all material regulations before doing so. They may unwittingly invite counterclaims that expose them to FCA liability, which can result in awards of treble damages to the government, plus stiff penalties. The case also demonstrates that even if the government has investigated an issue and declined to intervene in a qui tamaction, it may later resurrect those claims based on additional information or further investigation.

About the Author: Ambi Biggs is an associate with PilieroMazza who practices in the areas of litigation and government contracts. She may be reached at [email protected].