The Defense Criminal Investigative Service (DCIS) will investigate all allegations of abuse related to Government set aside programs designed to encourage and support veteran, woman and minority owned small businesses. Schemes…undermine not only the integrity of the programs, but the Government contracting process as a whole. This cannot be allowed.”
- Gregory P. Shilling, DCIS Southwest Special Agent

Federal government contracts are routinely awarded to companies supplying goods and services to U.S. government agencies. According to the Government Accountability Office, in 2023, the federal government committed about $759 billion in contracts. Most are awarded competitively with “full and open competition.” However, the government sets aside some contracts for certain kinds of small businesses, including businesses that participate in the 8(a) program, service-disabled veteran-owned small businesses, woman-owned small businesses, and businesses operating in Historically Underutilized Business Zones. Businesses that meet the SBA’s 8(a) program’s criteria can qualify for set-asides and contract preferences. Unfortunately, some companies have falsely claimed entitlement to contract set-asides and preferences.

The SBA’s rules concerning things like affiliation between businesses, which can lead to a finding that the entity is not small, can be complicated. But many cases, including the recent Eleventh Circuit opinion, Gose v. Native American Services Corporation, demonstrate that the government will not tolerate false statements by contractors seeking to gain and keep certifications to get lucrative contracts set aside for small, disadvantaged businesses when they do not actually qualify.

Somewhat troubling, at least as related to the FCA, is the following excerpt from Gose, in which the court essentially removed the plaintiff’s required burden of proof under Fed. R. Civ. P. 9(b) to identify and plead specific false claims that were submitted in fraudulent inducement FCA cases, stating:

When a relator alleges liability under a fraudulent inducement theory, “claims for payment subsequently submitted under a contract [or task order] initially induced by fraud do not have to be false or fraudulent in and of themselves in order to state a cause of action under the FCA.” … Specifying individual bids or claims—which themselves may not contain false information—adds little, if any, particularity concerning “the circumstances constituting fraud” here. … Instead, these additional and unnecessary details contravene Rule 8’s “short and plain statement” mandate.

Gose v. Native Am. Servs. Corp., No. 23-10600, 2024 WL 3533041, at *14 (11th Cir. July 25, 2024) (internal citations omitted).

Be Mindful of Affiliation Rules

Sometimes larger companies enter into joint ventures (JVs) with small companies, which if done correctly allows the JV to qualify as small business or 8(a) and to receive set-asides. However, as noted, the SBA rules are complicated and should be navigated with care and the benefit of experienced counsel. If such a company receives those set-aside contracts but does not otherwise follow SBA rules, and later seeks federal reimbursement payment, then the SBA or an FCA whistleblower may pursue the recovery of such funds, along with ruinous penalties and threats of debarment for alleged false claims.

Takeaways

• When entering into JV agreements or teaming arrangements that permit the team to qualify for set-asides, be careful about the structure and follow through, being mindful of changes to SBA rules, and be aware that DOJ is watching for Program 8(a) fraud.
   
• The FCA’s fraudulent inducement theory may “taint” a JV relationship and jeopardize subsequent reimbursement requests to federal programs, or even worse, render them “false” despite the quality of the services provided. And the taint may continue indefinitely throughout the period in question.
   
• For companies looking to get involved with joint ventures like these, it is imperative to retain counsel to advise them how to navigate these perilous waters and avoid opportunistic would-be plaintiffs and federal agencies.
   
• FCA investigations should be avoided at all costs due to the threat of treble damages, debarment or exclusion—along with the risks of shareholder suits, bad publicity, and follow-on administrative actions. Proper planning, counseling, and compliance is the first step. If an investigation is unavoidable, the key is to again retain experienced counsel who may interface with the government to lower the odds of government intervention, which may dramatically shift the odds.