Contractors ignoring the SCA and misusing the 8(a) program beware …
September 7, 2011
By: Lindsay Simmons
On July 25, 2011, the United States District Court for the District of Columbia ruled that the plaintiffs in a qui tam action brought against The Kane Company (“the Company”) under the False Claims Act (“FCA”) could proceed with their suit, holding they had adequately stated a claim under the FCA and for fraud.United States ex rel. Anthony Head v. Kane Co., No. 05-317 (D.D.C. July 25, 2011). The court’s holding that the plaintiffs adequately plead a FCA claim is interesting in that the FCA claim is based on the Company’s alleged failure to comply with the Service Contract Act (“SCA”). The plaintiffs’ fraud claim is likewise interesting in that they allege that the Company used an 8(a) small business as a pass through in order to obtain government contracts intended for Small Business Administration (“SBA”) certified 8(a) contractors.
The Service Contract Act
The Company entered into numerous government contracts to provide moving services to various government agencies that were governed by the SCA. But the plaintiffs allege that the Company regularly failed to pay SCA-required wages on these government contracts.
In its motion to dismiss, the Company argued that, among other shortcomings, the plaintiffs failed to allege that a false claim was made to the government (either explicitly false or fraudulent demands for payment) and therefore had not pled the requisite objective false statement underlying their FCA claims. The Company also argued the plaintiffs had not demonstrated that SCA compliance was material to the government’s decision to pay under the Company’s government contracts. The court disagreed on both counts.
After discussing the very broad interpretation given to the word “claims” under the FCA, and noting that an FCA claim can take any number of forms, the court found the plaintiffs’ allegations sufficient. Specifically, the plaintiffs alleged the Company (i) had submitted explicitly false invoices and false demands for payments under several of the contracts covered by the SCA; and (ii) had entered into government contracts “intending to flout the contracts’ SCA wage determinations” (thus “implicitly and falsely represent[ing] to the Government that it would comply with the SCA”). The court also found the Company was wrong in arguing that under the FCA compliance with a statutory requirement like the SCA is only material if the contract contains express language linking compliance to payment. According to the court, materiality may be established in other ways and plaintiffs “made allegations from which it can be reasonably inferred that the SCA was material to the Government’s payment decision” and “cite[d] to statutory provisions that raise the reasonable inference that SCA compliance was material.”
The SBA 8(a) Contracts
The court also held that the plaintiffs sufficiently alleged a fraud claim against the Company based on its relationship and dealings with an 8(a) company called the Perara Group. The court found clear and explicit allegations that the Company “made or caused to be made fraudulent representations to the Government that the Perara Group would be providing its services” under its government contracts. Specifically, the court held that plaintiffs’ allegations were sufficient in that plaintiffs alleged that (i) the Company used the 8(a) as a pass through to obtain payment from government contracts intended for SBA certified 8(a) contractors; and (ii) the Company and the 8(a) knowingly made false statements to the SBA in which they certified that the 8(a) “was acting in compliance with all pertinent laws and regulations, when in fact [it] was offering services for numerous government agencies it was not eligible to bid upon.”
This will be an important case to watch as it moves forward in the U.S. District Court.
Lindsay Simmons is the attorney responsible for the content of this article.