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Schuylkill Products: Important Lessons and Reminders about the Power of the False Claims Act




by:
Daniel E. Fierstein
Jennifer M. Horn
Katherine Tohanczyn
Cohen Seglias Pallas Greenhall & Furman PC - Philadelphia Office

 
July 4, 2014

Previously published on June 11, 2014

As many federal government contractors know, the False Claims Act (FCA) is a tool used by the federal government to deter fraud. Those found to have knowingly submitted false information to the government in violation of the FCA stand to suffer the imposition of fines, forfeiture of improperly obtained proceeds, and, in some instances, incarceration.

Recently, in the largest reported fraud case involving a disadvantaged business enterprise (DBE) in the country’s history, a Pennsylvania federal judge ruled against a government contractor in a $136 million DBE fraud claim brought by a former employee and whistleblower under the FCA. In that case, Schuylkill Products, Inc. (SPI), a Pennsylvania-based concrete bridge beam manufacturing company, conspired with and used Marikina Construction, Corp. (Marikina) as a “DBE” front to procure millions of dollars of federally funded DBE-designated work.

What Is a DBE Program?

Like many governmental agencies, the U.S. Department of Transportation (DOT) has a DBE program, which attempts to increase the participation of DBEs in state and local procurement. The DOT seeks to accomplish this goal by requiring state and local agencies receiving DOT funds to establish goals and requirements for the participation of DBEs (small businesses owned and controlled by socially and economically disadvantaged individuals, such as businesses owned by minorities and women). Contractors working on these transportation projects must make a good-faith attempt to meet specific DBE participation goals as a requirement of federal funding and can do so by subcontracting work that is actually performed and installed by a certified DBE.

The Schuylkill Products Case

In Schuylkill Products, SPI, its wholly owned subsidiary (CDS Engineers), and Marikina, a Connecticut-based contractor certified in Pennsylvania as a DBE, created a scheme through which Marikina subcontracted work to SPI that was federally mandated to be performed by a DBE. SPI employees, pretending to be Marikina employees, performed the work and received the profits. In order to give the appearance of compliance with the DBE rules to the federal government, PENNDOT, and the general contractor, SPI used Marikina business cards, email addresses, stationary, and decals in order to create the appearance that Marikina was performing the work.

Judge Rambo of the United States District Court for the Middle District of Pennsylvania found that this conduct fell squarely within the scope of the FCA and constituted clear violations of the FCA. Accordingly, the United States (and the former employee who initiated the FCA lawsuit) are entitled to monetary damages (the Court has not yet ruled upon the amount).

What Is the Takeaway from Schuylkill Products?

Schuylkill Products serves as a forceful reminder of the power of the FCA. The government, through its agencies and the private individuals that are permitted to enforce the FCA, monitors DBE compliance very carefully.

On the one hand, these programs provide excellent opportunities for small businesses to compete for government contracts on a more level playing field. On the other hand, the maze of rules and regulations that govern these programs must be taken seriously and followed carefully. In the face of this landscape, government contractors and contractors looking to enter the government contracting arena should consult with a construction attorney to ensure that their particular corporate structure, behavior, and contract comports with the rules.



 

The views expressed in this document are solely the views of the author and not Martindale-Hubbell. This document is intended for informational purposes only and is not legal advice or a substitute for consultation with a licensed legal professional in a particular case or circumstance.
 

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Author
 
Daniel E. Fierstein
Jennifer M. Horn
Cohen Seglias Pallas Greenhall & Furman PC
 
Philadelphia Office
Practice Area
 
Business Law
Government
 
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