Legal Meets Practical

A recent decision at the Small Business Administration (SBA) Office of Hearings and Appeals (OHA) shows that reasonable suspicion doesn’t warrant the sustaining of a size protest. There must be specific facts to back up an assertion that an awardee is “other than small.” And a protestor has to come up with them fast.

In Size Appeal Of: Phoenix Environmental Design, Inc., Appellant Re: Thornwell Warehouse Association, Inc., an unsuccessful offeror filed a size protest against the awardee of a U.S. Fish and Wildlife Service small business set-aside contract, alleging that the awardee was “other than small” under the applicable NAICS code. (SBA No. 5591, September 10, 2014). The protestor’s reasoning wasn’t based on concrete evidence, but rather logical reasoning – because the awardee had three locations and 180 shareholders, it was likely other than small. As stated in the size protest, “[The Protestor] believes that once [the Awardee] sends in a completed SBA Form 355, Completed IRS Form 4506-T, tax returns[s], and all applicable evidence that it is a small agricultural cooperative…SBA will determine that [the Awardee] is ‘other than small’ because their members are not small businesses.”

On June 30, 2014, the size protest was denied at the SBA Area Office because it was “non-specific” in accordance with 13 CFR 121.1007. There were no specific facts presented which brought into question the Awardee’s ability to qualify as small for the 500 employee size standard under the applicable NAICS code.

In affirming the denial of the size protest, on September 10, 2014 the SBA OHA noted that the protestor had offered no evidence, or reason to believe, that any of the awardees’ members exceeded the size standards associated with their primary industries. Rather, the protest called for the investigation of the issue, and was therefore non-specific under the meaning of 13 CFR 121.1007. Because size protests must be specific, the SBA Area Office properly dismissed the protest. The SBA OHA also noted that while the protestor had submitted additional evidence at the appeal level, it could not be considered because it had not been presented to the SBA area office.

This is an interesting decision because it illustrates the difficulty in pursuing a size protest after an award is issued. Under the regulations set forth at 13 CFR Part 121, a size protest must be filed within five business days of receiving a Notice of Unsuccessful Offer. If a contractor wishes to protest an award to another business on the basis that the latter is “other than small,” it must point to concrete, specific reasons.

The lesson here is simple – do your homework before lodging a size protest, and do it fast.

*Did you find this article informative? If so, sign up for Sarah Schauerte’s legal blog at: https://legalmeetspractical.com. Also, access the SBA OHA decision here.

by Sarah Schauerte

A False Claims Act (FCA) case brought by a small business owner against a large prime contractor is about to get really interesting. Several claims have survived a motion to dismiss before a federal district court, and the case will move forward.

Every large government contractor that’s been subject to a Small Business Subcontracting Plan, and every small government contractor that’s been used under a Small Business Subcontracting Plan, should take a look…

In U.S. ex. rel. Tien H. Tran v. Computer Sciences Corporation, a relator (aka whistleblower) brought an action under the FCA in the United States District Court for the District of Columbia, seeking to challenge the contracting practices of Computer Sciences Corporation (CSC)(D.D.C. Civ. No. 11-cv-0852). In the Complaint, Tran alleged that in a contract for the United States Citizenship and Immigration Services, CSC shirked its obligations to make a good faith effort to subcontract a certain percentage of IT work to qualified small businesses. According to the Complaint, rather than simply issuing valid subcontract awards, CSC set up a scheme where it would subcontract work to small businesses, which in turn would agree to further subcontract the work to large businesses that CSC trusted. The Complaint contended that this “pass-through” scheme violated several provisions of the FCA insofar as it permitted CSC to report to the government that it had met its small business subcontracting goals when, in reality, large businesses were performing the substantive work under the contract. Essentially, these practices constituted subcontractor pass-through fraud.

Upon the filing of the Complaint, the three defendants – CSC and two of its subcontractors (one a small business, the other one of the large businesses to whom work was allegedly funneled) – moved to dismiss. They all argued that Tran failed to state a claim upon which relief could be granted, and also that he failed to plead fraud with the requisite particularity required by the Federal Rules of Civil Procedure.

In a 58-page memorandum where the Court granted partial relief to the defendants, it found that Tran had pled sufficiently to allow some of its FCA claims against CSC to move forward (the “Opinion”). The Opinion quoted extensively from the Small Business Act (15 U.S. C. §631-657) and the FCA, relying on the purpose and intent of these statutes in analyzing the three different categories of Tran’s allegations.

Notably, the Court rejected CSC’s reasoning that because regulatory requirement provide that small businesses performing set-aside service contracts must spend at least 50% of the cost of contract performance on small business personnel, this does not prohibit them from further subcontracting to large businesses (i.e., that they can do what they want with the other 50% – subcontracting up to 50% of what they receive in set-asides to large businesses without losing their set-aside status).

The Court didn’t buy CSC’s argument. It reasoned that just because the regulation didn’t come out and say that small businesses couldn’t subcontract work out to large businesses, that didn’t mean they could.  As the Court stated, “CSC does not explain why – as a matter of pure statutory interpretation – total silence in a regulation or statute regarding the matter in which small businesses are permitted [to] fulfill their contracting needs in the circumstances at bar should be interpreted as evidence of an intent to bless the pass-through arrangement.” In other words, silence is not consent – if something smells rotten, it doesn’t need to be explicitly prohibited. Especially if it fails to comport with the purpose of the statutes and regulations enforcing such small business practices.

Further, these were not set-aside contracts where the 50% rule applied – these were subcontracts issued by a large prime contractor to comply with its Subcontracting Plan. As such, the Court determined that nothing in CSC’s motion to dismiss established that the challenged pass-through scheme was unquestionably proper to the extent that Tran’s Complaint should have been dismissed as a matter of law.

Similarly, the Court allowed Tran’s claims of (false) presentment and material false statements against CSC to survive. Tran alleged that CSC regularly presented claims for payment to the government that were knowingly false insofar as CSC was implicitly representing that it had complied with the terms of its Subcontracting Plan when, due to the nature of the pass-through scheme, it had not in fact done so.  The Court found that Tran’s claims contained all elements of a presentment claim based on a theory of implied false certification. It also found that Tran had set forth all elements of material false statements by CSC because it had sufficiently alleged that CSC had made material false statements to the government in the form of its submission of semi-annual reports (ISRs and SSRs) pursuant to 48 CFR 52.219-9, which were material to the Government’s decision to pay CSC’s invoices.

Note that here, CSC has not been found liable for any wrongdoing. This Opinion is at the (early) motion to dismiss stage, which is when a court determines whether a plaintiff has pled sufficient facts and elements to show that it may be entitled to relief under the law. Discovery still has not taken place, and CSC may still prove that its actions did not constitute subcontractor pass-through fraud. This is also a case where the U.S. declined to intervene on behalf of the whistleblower. (Statistically, the U.S. intervenes in approximately 25% of whistleblower cases).

It is interesting to note, however, that the court has specifically disagreed with CSC’s argument that “Tran has failed to state a claim upon which relief can be granted because federal law and regulations condone the very behavior that Tran contends is unlawful.” CSC is not arguing that it has not done what Tran has alleged, merely that its actions were not unlawful.

While there have been prior court opinions over the years that looked at FCA violations in the context of Subcontracting Plan misconduct, Tran is certainly one of the most well-reasoned and detailed. It touches upon many issues that both small and large contractors encounter in teaming arrangements – what is lawful, and what crosses the line? As this case moves forward, CSC’s position and actions will be scrutinized and analyzed by the Court, and the outcome may serve as a lesson for many large (and small) subcontractors.

*Did you find this article informative? If so, sign up for Sarah Schauerte’s legal blog on veterans small business issues here. (This blog will also cover this particular case as it progresses). Also, access the Opinion here.