|July 24, 2013|
Previously published on July 22, 2013
Nearly three years ago, on September 27, 2010, the President signed into law the Small Business Jobs Act of 2010 (“Jobs Act”), which directed the Small Business Administration (“SBA”) to implement a variety of small business size and integrity requirements. As noted in our prior blog posting discussing many of these requirements, many of these provisions posed a significant threat to government contractors - both large and small businesses alike. On October 7, 2011, the SBA published its blueprint for implementing the statutory requirements. See 76 Fed. Reg. 52313 (the “Proposed Rule”). The Proposed Rule contained language that many industry participants and observers found alarming, particularly the requirements that:
(1) Established an irrefutable presumption of loss, equal to the value of the funding instrument, if a contractor was found to have willfully misrepresented its size status in connection with a small business set-aside award;
(2) Held that the mere act of submitting an offer or application for a small business set-aside award constituted a willful “deemed certification” as to the contractor’s size status; and
(3) Provided that contractors who failed to submit annual updates to their size or status in their Online Representations and Certifications Application (“ORCA”), or any successor thereto (i.e., the System for Award Management (“SAM”)), could no longer be identified in the database as small or otherwise disadvantaged until the representation was updated.
Finally, on June 28, 2013 -1,006 days after the Jobs Act was passed - the SBA got around to issuing its final rule (“Final Rule”). Effective August 27, 2013, the Final Rule largely adopts the more troubling components of the Proposed Rule, although it does extend a least a little mercy. Given the potentially severe effects of noncompliance with the Final Rule, we examine three key provisions to which we think contractors should take keen notice, particularly because of the significant risks that these new provisions may pose.
#1: Presumption of Loss for Willful Size Misrepresentations
If a contractor is found, through misrepresentation, to have “willfully sought and received” an award for a contract, subcontract, cooperative agreement, cooperative research and development agreement, or grant that is “set aside, reserved, or otherwise classified as intended for award to small business concerns,” the Final Rule establishes a “presumption of loss” to the Government which is equal to the value of the funding instrument.
For example: this means that if a contractor is awarded a small business set-aside contract valued at $5 million, and it later turns out that the contractor was not, in fact, a “small business,” the government is entitled to claim at least $5 million in damages, even if the contract was performed 100% to the government’s satisfaction. The rationale behind this formulation is that the government wanted a contract with a small business, but it did not get it; as such, the full value of the contract is the measure of the government’s damage. This kind of draconian remedy is hardly fair and balanced, but the courts (including the U.S. Court of Appeals for the Federal Circuit) and Congress believe that this kind of severe remedy is required to deter bad behavior by contractors and to make the government whole.
A few points (both good and bad) are worth noting about the presumption under the Final Rule:
- The presumption of loss is (barely?) rebuttable. Although the presumed loss is no longer “irrefutable,” liability is only relieved in instances of unintentional error, technical malfunction, or other similar situation situations that demonstrate the size misrepresentation “was not affirmative, intentional, willful or actionable” under the False Claims Act (“FCA”), 31 U.S.C. §§ 3729, et seq. Conduct falling short of these very narrow safe harbors will almost certainly be insufficient to shield against a finding of presumed loss, which - as the Preamble to the Final Rule makes clear - “will be utilized in civil and criminal Federal court proceedings” against the contractor. The Final Rule does not shed any additional light on what other types of conduct or proof might be sufficient to rebut the presumption, but experience tells us that most presumptions favoring the government are not easily reversed.
- Prime contractors acting in good faith are not necessarily liable for the size misrepresentations of their subcontractors. Although the SBA does not define what constitutes a contractor’s “good faith” efforts to comply, the Final Rule notes that the government should consider certain factors in assessing a prime contractor’s liability, including: (1) the contractor’s internal management procedures governing size representation or certification, (2) the clarity or ambiguity of the representation or certification requirement, and (3) the efforts made by the contractor to correct an incorrect or invalid representation or certification in a timely manner. Moreover, a company cannot be held liable if the government has erroneously identified a concern as small without any representation or certification having been made by the contractor, and where the contractor is without knowledge of the erroneous nature of the government’s identification. But, if a company misrepresents itself to the SBA in order to obtain the SBA’s stamp of approval, then all bets are off. The “safe harbor” likely will not apply.
- Significant civil and criminal penalties attach to a finding of misrepresentation. Potential sanctions include suspension and debarment, civil prosecution under the FCA (and DOJ may well seek treble damages on any presumed “loss”), the Fraud Civil Remedies Act (31 U.S.C. §§ 3801-3812), and criminal prosecution under the Small Business Act (15 U.S.C. § 645(d), as amended, 18 U.S.C. § 1001, 18 U.S.C. § 287). Remember that example of the $5 million small business set-aside we talked about earlier? Multiply that by three and you realize that a company could have exposure as high as $15 million for a contract that was performed perfectly. This is the punitive effect of the FCA. Moreover, individuals and companies are also subject to criminal prosecution for knowingly making false statements or misrepresentations to the SBA for the purpose of influencing the SBA, including the failure to correct “continuing representations” that are no longer true. The foregoing penalties are in addition to any other applicable law pursuant to which a contractor may be charged for violating the Final Rule.
#2: Deemed Certifications
The Final Rule lists three categories of conduct that are “deemed” to constitute “affirmative, willful and intentional certifications of small business size and status.” Accordingly, any of the following acts can give rise to criminal or civil liability based on a deemed certification as to size or status:
- Submission of a bid, proposal, application or offer. This includes the mere act of responding to a solicitation for a contract, subcontract, grant, or entering into an agreement that is in any way reserved, set aside, or otherwise classified as intended for award to small business concerns.
- Encouragement to classify the bid or proposal, if awarded, as an award to a small business concern. When preparing an offer, a contractor that, “in any way,” expressly or impliedly, encourages the procuring agency to award the contract as a small business set aside will be found to have willfully and intentionally certified itself as small. This includes making statements relating to the agency’s small business contracting goals.
- Database Registration. A contractor is deemed to certify itself as small if it registers on any Federal electronic database (i.e., SAM), for the purpose of being considered as a small business concern for award of a contract, subcontract, Federal grant or other agreement involving the obligation of Government funds.
The Final Rule is silent as to whether any of these “deemed certifications” can be avoided by a company expressly disclaiming that it is a small business (or, stated another way, by affirmatively stating that it is a “large business”). As such, contractors should be careful with regard to what they do, as well as what they say regarding their business size.
#3: Annual Certification Updates
Contractors that want to be identified as small are now required to submit size certifications in SAM (or any successor database) “at least annually.” If a contractor previously identified as small in SAM fails to certify its size within one year of a size certification, then the firm loses is status in SAM until it recertifies its size. Particularly where a company will be deemed to have certified that it is small based on an outdated registration in SAM, contractors must ensure that they are updating their business size status as required by the rules. As set forth above, failure to update or failure to comply carries significant risks.
The Final Rule has potentially far-reaching consequences for Government contractors. If a contractor is found to have misrepresented its size or status in connection with a set aside award, the firm is subject to potentially catastrophic liability in both the civil and criminal realms. Accordingly, contractors are wise to carefully evaluate each business opportunity with deliberate caution towards whether pursuing the endeavor (or even simply registering with SAM), carries undue risk. If it does, get out while you still can.