DOJ Settlement Highlights Importance of Proper Size Certification and Knowing Affiliation Rules

On Wednesday, July 6, 2016, the Department of Justice announced the settlement of False Claims Act (“FCA”) allegations against En Pointe Gov, Inc. and a number of its parent companies and affiliates. The settlement arose out of a False Claims Act complaint filed by Minburn Technology Group, LLC, and its Managing Member alleging that En Pointe Gov and its affiliates falsely certified that En Pointe Gov qualified as a small business for purposes of GSA contracts set aside for small businesses. In particular, the Complaint alleged that En Pointe Gov was affiliated with En Pointe Technologies, Inc., a large, global information technology company, through corporate and family relationships. Notably, Minburn Technology Group, the relator, is a Virginia-based small business, and presumably had been a direct competitor of En Pointe Gov.

Although settled early (and for far less than the alleged damages), this case emphasizes the importance of properly certifying size status when competing for government contracts. False or improper certifications often generate protests challenging the awardee’s size status; but, with increasing frequency, they also can lead to False Claims Act allegations with surprisingly substantial damages at stake. Under the Small Business Administration’s “Presumed Loss” rule, 13 C.F.R. 121.108, the Government can claim the entire value of contracts awarded based on a false small business representation. This amount is then subject to mandatory trebling under the FCA, coupled with penalties per invoice. The plaintiff (in this case, En Pointe’s competitor) also can receive a substantial portion of this recovery, and the plaintiff’s attorneys are entitled to statutory attorneys’ fees. There is a significant financial incentive behind these cases.

Moreover, even if the case is resolved short of litigation, the existence of the case or its settlement can lead to the contractor and its owners being subject to suspension or debarment, as well as suffering the adverse past performance ratings that can affect a business for years.

All of this emphasizes the importance of understanding and abiding by the SBA’s affiliation provisions, particularly when representing small business status. As sophisticated contractors understand, the size of a single corporate entity is often not the end of small business analysis. Here, although En Pointe Gov may have qualified as a small business standing alone and had not been directly owned by En Pointe Technologies since 2011, it was owned by a holding company, Dominguez East Holdings (“DEH”), with significant affiliations. Specifically, the President and sole owner of DEH was the son of the owner of another company, Din Global, that was the parent company of En Pointe Technologies. En Pointe Gov also utilized the same business address and office as En Pointe Technologies, used special arrangements with hardware and software vendors that were set up by En Pointe Technologies, and worked with a subsidiary of En Pointe Technologies for sales and marketing services. This web of connections, and the presumed affiliation between immediate family members, likely created affiliation even where the formal corporate ownership was separate. As a result, En Pointe Technologies’ revenues and number of employees needed to be counted along with En Pointe Gov’s for size status purposes.

Plaintiff’s attorneys and the Department of Justice are increasingly aggressive and creative in pursuing FCA theories across the field of government contracting. But little creativity is required when the issue is as straightforward as an apparent incorrect size certification. Compounding the risk is the fact that competitors for small business awards regularly scrutinize their business adversaries for flaws in size representations. Historically, this has resulted in size protests. In today’s environment, however, it is a short step for those competitors to shift from filing size protests to pursuing FCA complaints. Be assured there is a cadre of plaintiff’s attorneys who will be eager to help them. There is a lot of money to be made in the FCA.

 

[1] The DOJ recently issued an interim rule that will result in an increase in the per-claim penalties to almost double the previous amounts.