According to its mission statement, the Small Business Association is supposed to “aid, counsel, assist and protect the interests of small business concerns, to preserve free competitive enterprise and to maintain and strengthen the overall economy of our nation.” A new rule issued by the SBA makes it considerably easier for the federal government to prosecute and seek civil penalties against companies (and presumably their executives) who engage in government contract work but misrepresent their small-business status.
The new rule, published June 28, 2013, implements the Small Business Jobs Act of 2010. The rule states that for every government contract,
there shall be a presumption of loss to the United States based on the total amount expended on the contract . . . whenever it is established that a business concern other than an 8(a) Participant [a qualified small business] willfully sought and received the award by misrepresentation. (emphasis mine)
Before this rule, it was sometimes difficult for the government to prove damages because the contractor actually provided the agreed-upon services, even though it was not truly a small business under the relevant regulations. The new rule means that the government can simply substitute the value of the underlying contract for the amount of loss to the government.
- In a civil False Claims Act case, this rule effectively satisfies proof of damages; keep in mind that the FCA allows for treble damages.
- In a criminal prosecution, the rule may allow the government to use the contract value as the amount of “loss” for the Sentencing Guidelines calculation.
The new SBA rule applies not only to set asides for small businesses but also for any contract where the scoring system gives credit for working with a small business, so it has far-ranging effects. For example, where a prime contractor relies on subcontractors that are small businesses to win a contractor, the prime contractor could forfeit the contract where a subcontractor turns out not to be an 8(a) entity.
There are two pieces of good news here.
First, the SBA’s final rule did agree to eliminate the word “irrefutable” before “presumption of loss,” so there is some room for defendants to argue that this presumption should not be applied in a particular case.
Second, the rule requires the conduct to be “willful,” so, in theory, an honest mistake will not trigger this presumption. The government, of course, takes a very broad view of “willful” conduct, so companies engaged in government contracting should be sure to conduct sufficient due diligence of their subs to ensure they are truly small businesses.
The rule takes effect on August 27, 2013. Given its effect on the government’s burden of proof on damages or loss, the new rule may lead to an uptick in criminal prosecutions and civil cases against corporations.