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Earlier this week the Pentagon issued a statement that cyber-attacks by a foreign nation could be considered an act of war that could elicit a traditional military response. Specifically, Pentagon spokesperson Col. Dave Lapan said that “a response to a cyber-incident or attack on the US would not necessarily be a cyber-response. All appropriate options would be on the table.” This statement comes as the United States grapples with putting together a comprehensive cybersecurity and warfare policy. The development of such a policy must involve a complete understanding of the laws and authority surrounding cyber warfare. Yet, these laws and authorities are, for the most part, uncharted waters. 

The American Bar Association has several committees dedicated to charting these waters and on June 13, 2011, at 12:00 pm EDT, the Science & Technology Law (SciTech) Section’s Homeland Security Committee, the Public Contract Law (PCL) Section’s Cybersecurity Committee and the Standing Committee on Law and National Security are co-sponsoring a joint program focusing on the emerging—and often unsettled—legal and policy issues arising out of cyber warfare. 

The panel for the joint program includes:

  • Dr. Herbert S. Lin, Chief Scientist, Computer Science & Telecommunications Board, National Research Council of the National Academies & Study Director for Technology, Policy, Law, and Ethics regarding U.S. Acquisition and Use of Cyberattack Capabilities;
  • Dr. Catherine Lotrionte, Executive Director, Institute for Law, Science and Global Security at Georgetown University and former Counsel to the President’s Foreign Intelligence Advisory Board at the White House;
  • Suzanne Spaulding, Principal, Bingham Consulting Group and former General Cousnel for the Senate Select Committee on Intelligence and Assistant General Counsel at CIA; and
  • The program will be moderated by David Z. Bodenheimer, a partner at Crowell & Moring LLP, Co-Chair of the SciTech Homeland Security Committee and Vice Co-Chair of PCL Cybersecurity Committee. 

The program will be held at the offices of Crowell & Moring LLP at 1001 Pennsylvania Ave., N.W., Washington, D.C. and lunch will be served to those attending in person. You can also attend by phone. The cost to attend (either by phone or in person) is $15. 

Please register here.

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On April 13, 2011, the Obama administration released a draft executive order called “Disclosure of Political Spending by Government Contractors.” This executive order, if implemented, would instruct the FAR Councils to amend the FAR to require significant disclosures about contractor political contributions to be made as part of any proposal submitted by a firm seeking a federal contract. The disclosures would not only cover the contributions by the company itself, but also the company’s affiliates, the company’s political action committees, and the individual contributions of all officers and directors:

(a) All contributions or expenditures to or on behalf of federal candidates, parties or party committees made by the bidding entity, its directors or officers, or any affiliates or subsidiaries within its control; and

(b) Any contributions made to third party entities with the intention or reasonable expectation that parties would use those contributions to make independent expenditures or electioneering communications.

The disclosure obligation would kick in any time the aggregate amount of contributions given to a single source reach $5000 and the information collected would be posted of the Data.gov website so that the public could access the information. 

In the six weeks since this draft executive order was released, there has been significant backlash from industry. A wide array of trade associations and business advocacy groups, including the Professional Services Council, the Aerospace Industries Association, and the U.S. Chamber of Commerce, have chimed in to vigorously oppose the proposed order. At the same time, watchdog groups of applauded the proposed Order as an example of increased transparency in the area of federal contracting. 

While the Obama administration has assured critics that the information collected would not be considered as part of the evaluation of proposals (beyond the threshold issue of whether the certification of full disclosure was completed), questions persist about whether the draft Order would cause exactly the situation it seeks to avoid—injecting politics into the federal contracting system by providing competitive decision-makers with information they would not otherwise have possessed in the regular course of business. Other entities are concerned about the chilling effect this draft Order would have on political contributions by individuals at the company, whose personal political interests may have little or nothing to do with the interests of the employer. 

In the last week, groups of Republicans in both the House and Senate, led by Darrell Issa (R-California) and Susan Collins (R-Maine) respectively, have introduced legislation called the Keeping Politics Out of Federal Contracting Act of 2011, which would effectively preempt the draft Obama Executive Order by prohibiting federal agencies from collecting the political contribution information of contractors and their employees as part of a federal procurement. The statute would also prohibit federal agencies from using political affiliation or contribution information received from any source as a factor in the award of federal contracts. 

We will keep our readers apprised as the situation continues to develop.

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On May 18, 2011, the DoD released an interim Business Systems rule with request for comments.  76 Fed. Reg. 28856.  Comments are due July 18, 2011.  The current version of the rule reflects comments received on the prior two proposed Business Systems rules (published January 15, 2010 and December 3, 2010), requirements in the National Defense Authorization Act for FY 2011, and additional revisions to the rule.

 Six business systems are covered by this rule:

·       Accounting System

·       Earned Value Management System (“EVMS”)

·       Estimating System

·       Material Management and Accounting System (“MMAS”)

·       Property Management System

·       Purchasing System

DoD characterizes these business systems as the “first line of defense against waste, fraud, and abuse.”  Accordingly, DoD sees this rule as improving the effectiveness of DoD oversight of contractors and achieving more effective and efficient management of DoD programs.  Notable changes with this version of the rule include the following:

Covered Contracts – The rule makes clear that contracts covered by the withholding provisions of the Contractor Business System rule will be contracts subject to the Cost Accounting Standards, but the substantive requirements of the interim rule specifying requirements for compliant business systems are not limited to CAS –covered contracts.  Therefore, small businesses will not be subject to withholding under the rule, but they may be required to meet relevant requirements for compliant business systems.  There is also nothing in the rule that would suggest that subcontracts are covered by the withholding requirements, although they are covered by some of the systems requirements, as described below.  

“Significant Deficiency” – The interim rule defines a “significant deficiency” as “a shortcoming in the system that materially affects the ability of officials of the Department of Defense to rely upon information produced by the system that is needed for management purposes.”  This term is used throughout, and replaces phrases such as “deficiency that adversely affects the system” or “deficiency that adversely affects the system, leading to a potential risk of harm to the Government.”  A determination by the government that a “significant deficiency” exists with a contractor’s business system will be grounds for issuing a notice of withholding of payment and will require the contractor to submit a corrective action plan.  The rule allows for contractor response to an initial finding of a “significant deficiency” and the contracting officer (“CO”) will have final authority to determine whether a “significant deficiency” exists. The CO is required to describe the deficiency in sufficient detail to allow the contractor to understand the deficiency.

Withholding – The rule provides that if a CO issues a final determination that a contractor’s business system contains significant deficiencies, that final determination that there is a significant deficiency “will” include a notice of payment withholding.  However, unlike versions of the proposed rule, the CO will be required to make a final determination that a significant deficiency exists before withholding will be permitted.  The CO is directed to withhold 5% of amounts due from progress payments and performance-based payments.  Also, the CO will direct the contractor to withhold 5% from its billings on interim cost vouchers on cost, labor-hour, and time-and-materials contracts.  The withholding will continue until the CO determines that the contractor has corrected all significant deficiencies.  However, if the contractor submits, within 45 days of notice of the significant deficiency determination, a corrective action plan, the CO could determine to reduce the withholdings to 2%.  Because the withholding provisions apparently apply only to CAS-covered prime contracts, it is not clear what remedy the Government could invoke for system deficiencies on contracts and subcontracts not subject to the withholding provisions.  

Limitations on and Flexibility with Withholding – The rule establishes the ceiling on the withhold percentage as 5% for one or more significant deficiencies in any single business system and 10% for significant deficiencies in multiple business systems.  Note that payment withholding is not permitted on fixed-price line items where performance is complete and the items accepted by the government.  The interim rule also provides that the CO can identify one or more covered contracts containing the Contractor Business Systems clause (252.242-7005) from which to withhold payments.  In other words, the CO is no longer required to withhold payment from every contract containing the Contractor Business Systems clause, and the CO has the sole discretion to identify the contracts from which to withhold payments.  

Recognition of Government Delays – The interim rule recognizes, to a certain extent, that delay on the government’s part occurs and takes steps to decrease the impact on contractors resulting from any such delay.  For example, normally, withholding of payments will be discontinued when the CO determines that the contractor has corrected all significant deficiencies.  Because there can be delay between when a contractor notifies its CO of a corrected significant deficiency and when the CO makes a determination that the significant deficiency is, indeed, corrected, the rule requires a reduction of the withhold percentage, by at least 50%, if 90 days has passed since the CO received notification of the correction and the CO has not yet verified that the significant deficiency has been corrected.  Nevertheless, the 50 percent withholding could continue indefinitely under the rule as promulgated, unless that contractor initiates a dispute under the CDA to seek payment.  Also, whereas the proposed rule required initial validation of an EVMS within 16 months, the interim rule allows for the CO to extend the deadline by which the initial validation must be done. 

System Approvals – The government will be permitted to issue approval of a business system only when there are no remaining significant deficiencies.  Although the rulemakers say that system approval will not be issued for “substantially corrected” systems, if the deficiencies have been corrected so that no “significant deficiencies” remain, withholding should cease.

An overview of the requirements, as set forth in the interim rule, for each of the six systems is provided below (as noted above, these substantive requirements are not limited to CAS-covered prime contracts):

Accounting System – Contractors receiving cost-reimbursement, incentive type, time-and-materials, or labor-hour contracts, or contracts which provide for progress payments based on costs or a percentage or stage of completion, are required to maintain an accounting system.  An accounting system is required to provide for, for example, a sound internal control environment, accounting framework, and organizational structure; proper segregation of direct and indirect costs; identification and accumulation of direct costs by contract; accumulation of costs under general ledger control; periodic monitoring, and a timekeeping system that identifies employees’ labor by intermediate or final cost objectives.  If a CO determines that an accounting system deficiency affected a contractor’s proposal, the CO can allow the contractor additional time to correct the deficiency, consider another type of contract (e.g., fixed-price incentive instead of a firm-fixed-price contract), use additional cost analysis techniques to determine cost reasonableness, or reduce the  negotiation objective for profit or fee.  It is not clear how these provisions relate to the FAR prohibition on awarding a cost-reimbursement contract in the absence of an “adequate” accounting system (see FAR 16.301-3(a)(1)).  

Earned Value Management System – The EVMS requirements apply to contractors that receive cost or incentive contracts valued at $20,000,000 or more and other contractors as determined by the CO.  The interim rule requires a contractor to use (a) an EVMS that complies with the EVMS guidelines in the American National Standards Institute/Electronic Industries Alliance Standard 748, Earned Value Management Systems (ANSI/EIA-748) and (b) management procedures that provide for generation of timely, reliable, and verifiable information for the Contract Performance Report (“CPR”) and the Integrated Master Schedule (“IMS”) required by the CPR and IMS data items of the contract.  If the contract has a value of $50 million or more, the contractor will be required to use an EVMS that has been deemed acceptable by the Cognizant Federal Agency (“CFA”).  Any changes proposed by the contractor to its EVMS will need to be approved in advance by the CFA.  If the contract is less than $50 million, the government will not make a formal determination of compliance with ANSI/EIA-748, and advance government approval of changes will not be required.

Estimating System – Contractors with contracts awarded on the basis of cost or pricing data are required to maintain an estimating system that is reliable and consistent, produces verifiable, supportable, documented, and timely cost estimates, is consistent with and integrated with the contractor’s related management systems, and is subject to financial controls systems.  For those contractors who received in their preceding fiscal year DoD prime contracts or subcontracts exceeding $50 million, they must disclose their estimating system in writing to the Administrative Contracting Officer (“ACO”).  Additionally, the same disclosure requirement applies to those contractors who received in their preceding fiscal year DoD prime contracts or subcontracts exceeding $10 million and who were also notified by their CO that disclosure would be required.

Material Management and Accounting System –  Except for contracts awarded to small businesses, educational institutions, and nonprofit organizations, the MMAS requirements apply to non-commercial item contracts over the simplified acquisition threshold awarded on a cost-reimbursement basis or on a fixed price basis with progress payments made on the basis of incurred costs.  The interim rule requires contractors to (a) maintain an MMAS that reasonably forecasts material requirements, ensures that costs of purchased and fabricated material charged or allocated to a contract are based on valid time-phased requirements, and maintain a consistent, equitable, and unbiased logic for costing of material transactions and (b) assess its MMAS and ensure it has adequate internal controls in place to ensure system and data integrity.  The rule identifies a number of internal controls required for an MMAS, including having policies, procedures, and operating instructions describing its MMAS, ensuring that material costs are charged to a contract based on time-phased requirements identified in the rule, and implementing mechanisms to identify, report, and resolve system control weaknesses and manual override.  

Property Management System – The property management system requirements apply to cost reimbursement, time-and-material, and labor-hour type contracts as well as fixed price contracts where the Government will provide Government property.  The interim rule requires contractors’ property management system, which manages and controls government property, to comply with FAR 52.245-1.  This FAR clause requires contractors to maintain a system that creates and maintains records of all government property accountable to the contract; periodically performs, records, and discloses physical inventory results; has a process to create and provide reports of discrepancies, loss, theft, damage, or destruction; and complies with property closeout requirements.

Purchasing System – The purchasing system requirements apply to cost reimbursement contracts; letter contracts, time-and-materials contracts, and labor-hour contracts over the simplified acquisition threshold; and fixed price contracts over the simplified acquisition threshold under which unpriced contract actions are anticipated.  Contractors will be required to maintain a purchasing system that meets a number of criteria set forth in the rule.  These criteria include having an adequate system description, including policies, procedures, and purchasing practices that comply with the FAR and DFARS; ensuring that all applicable purchase orders and subcontracts contain all flowdown clauses; maintaining an organization plan that establishes clear lines of authority and responsibility; ensuring all purchase orders are based on authorized requisitions; maintaining adequate documentation of the history of purchase transactions; and applying a consistent make-or-buy policy.  The rule addresses methods for the government to mitigate the risk of purchasing system deficiencies on specific proposals, which include segregating the questionable areas as a cost-reimbursable line item, including a contract reopener clause that provides for adjustment of the contract amount after award, and reducing the negotiation objective for profit or fee.  The criteria for purchasing systems in the clause DFARS 252.244-7001 Contractor Purchasing System Administration includes several new requirements that may be problematic.  Subparagraph (c)(16) of the clause requires that the purchasing system must enable the contractor to “notify” the Government of the award of all subcontracts that include flowdown clauses authorizing the Government to audit the subcontractor and “ensure the performance of audits of those subcontractors.”  There is no explanation of how or when the required notice is to be provided to the Government or how the contractor is expected to “ensure the performance” of authorized Government audits.  Subparagraph (c)(24) of the clause requires that the contractor provide “timely notice” to the Government if the prime contractor changes the amount of subcontract effort after award so that it exceeds 70 percent of the value of the contract or order and to provide the same notice if any subcontractor makes such a change as to lower-tier subcontract effort.  While such situations are likely to be uncommon, it is not clear how contractors, particularly large companies with thousands of active contracts, will monitor those contracts to identify the few unusual cases that may require notification. 

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On Monday, May 16 the U.S. Supreme Court held that a federal agency’s written response to a FOIA request for records constitutes a “report” within the meaning of the public disclosure bar in the False Claims Act (“FCA”), 31 U.S.C.  § 3729 et seq.  (See Schindler Elevator Corp. v. United States ex rel Kirk).  Reversing a decision of the Second Circuit, and resolving some discord between various circuit courts of appeal, the Court’s decision strengthened the public disclosure bar and characterized the case as “a classic example of the ‘opportunistic’ litigation that the public disclosure bar is designed to discourage.”  In its 5-3 decision,[1] the Court found that the words congressional, administrative or GAO, which precede the word report, “tell us nothing more than that a ‘report’ must be governmental.”

The FCA’s public disclosure bar precludes private parties from bringing qui tam suits to recover falsely or fraudulently obtained federal payments where those suits are “based upon the public disclosure of allegations or transactions in a criminal, civil, or administrative hearing, in a congressional, administrative, or Government Accounting Office report, hearing, audit, or investigation, or from the news media.”  31 U.S.C. § 3730(e)(4)(A).  In Schindler, the qui tam relator brought such a suit, alleging that his former employer had submitted hundreds of false claims for payments to the federal government.  The relator alleged that the company’s claims for payment were false because the company had falsely certified its compliance with the Vietnam Era Veteran’s Readjustment Assistance Act of 1972 (VEVRAA).  VEVRAA requires the company to submit to the government certain information, including how many of its employees are “qualified covered veterans,” on “VETS-100” forms on a yearly basis.  In support of his allegations, the relator relied on information regarding the company’s VETS-100 submissions that he obtained via three records requests his wife filed under the Freedom of Information Act (FOIA), 5 U.S.C. § 552.

The district court granted the company’s motion to dismiss, concluding that the FCA’s public disclosure bar prohibited its jurisdiction over relator’s allegations that were based on information disclosed in a Government “report” or “investigation.”  The Second Circuit vacated and remanded the district court’s decision, effectively holding that an agency’s response to a FOIA request is neither a “report” nor an “investigation.”  The Supreme Court then reversed and remanded the Second Circuit’s decision, holding that a response to a FOIA request is a report for purposes of the FCA’s public disclosure bar.[2]  The Court reasoned that the word “report” in this context carries its ordinary, dictionary-defined meaning, and there is no textual basis for adopting a narrower definition of “report.” 

This Supreme Court decision resolves some discrepancy within the circuit courts of appeal with regard to this issue.  Although most circuits addressing the issue have already come to the conclusion that a response to a FOIA request constitutes a public disclosure, that conclusion was not uniform.  See e.g. United States v. Cath. Heatlhcare W., 445 F.3d 1147, 1153 (9th Cir. 2006) (response to FOIA request triggers public disclosure bar only if the underlying document itself emanates from an enumerated source in section 3730(e)(4)(A)); United States ex rel Siller v. Becton Dickinson & Co., 21 F.3d 1339, 1347-48 (4th Cir. 1994) (requiring proof that relator’s allegations are actually derived from the publicly disclosed information). 

Notwithstanding the Supreme Court’s determination of this matter, however, the scope and applicability of the public disclosure bar may not be a closed issue.   The majority issued a strongly-worded opinion that derided the relator’s conduct as the very type of “opportunistic” conduct “that the public disclosure bar is designed to discourage.”  It further reasoned that a different interpretation of the public disclosure bar would allow anyone to “identify a few regulatory filing and certification requirements, submit FOIA requests until he discovers a federal contractor who is out of compliance, and potentially reap a windfall in a qui tam action under the FCA.”  The dissent, on the other hand, lamented that the Court “weaken[ed] the force of the FCA as a weapon against fraud on the part of Government contractors” by “severely   limit[ing] whistleblowers’ ability to substantiate their allegations before commencing suit.”  Accordingly, the dissent effectively invited Congress to turn its attention to the matter.  Of late, there has been much Congressional attention to strengthening anti-fraud laws, including recent amendments to the FCA through the Fraud Enforcement and Recovery of 2009, as well as the Patient Protection and Affordable Care Act.  Following this trend, it appears that further such legislation would not be out of the question.

 

 

[1] Justice Kagan took no part in the consideration or decision of the case.

[2] The Court did not address whether an agency’s search in response to a FOIA request also qualifies as an “investigation.”

I will be participating in a webinar on June 1, 2011, to discuss GSA Schedule contracting. This webinar will provide an informative overview of the key contract requirements and compliance obligations, including pricing disclosures, the Price Reduction Clause, Trade Agreements Act, labor qualifications, and payment of the Industrial Funding Fee. It will also provide insightful discussion of recent enforcement actions against GSA Schedule contractors, the creative fact finding and legal theories underlying these actions, and ways to minimize compliance risks and avoid large settlements to resolve contractual noncompliances. Please register for this webinar by going to: http://www.straffordpub.com/products/gsa-schedule-contracts-opportunities-and-legal-risks-2011-06-01.

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On May 16, 2011, GSA published a Notice to clarify whether information contractors input into the Federal Awardee Performance and Integrity Information System (“FAPIIS”) is exempt from disclosure under the Freedom of Information Act (“FOIA”). Presumably this Notice was prompted by a recent flood of FOIA requests. In essence, the Notice provides that Information posted on or after April 15, 2011 will be available to the public and not exempt from disclosure. But any information entered before April 15, 2011, is exempt from disclosure under b(4).

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In Santa Barbara Applied Research, Inc. (“SBAR”) v. United States, No. 11-86C (May 4, 2011), Judge Firestone of the United States Court of Federal Claims (“COFC”) ultimately upheld the Air Force’s in-sourcing decision on facts that are largely sui generis. However, before ruling in the Air Force’s favor on the merits of the cost comparison, Judge Firestone first unequivocally held that the COFC has subject matter jurisdiction to hear a challenge to a DoD in-sourcing decision, and the Plaintiff, the incumbent provider of the in-sourced services, had standing to bring such a challenge.

As a threshold matter, the government did not dispute that the COFC had jurisdiction to hear SBAR’s in-sourcing challenge under the Tucker Act, 28 U.S.C. § 1491(b)(1), because the matter involved the “alleged violation of statute or regulation in connection with a procurement or proposed procurement.” The government’s position on the COFC’s exclusive jurisdiction to hear in-sourcing challenges was consistent with the position that it has taken in a number of recently filed in-sourcing challenges in the district courts.

However, in moving to dismiss SBAR’s challenge for a lack of standing, the government staked out a position that was directly inconsistent with the arguments that it had advanced in moving to dismiss the district court in-sourcing cases. In this regard, the government moved to dismiss the SBAR challenge at the COFC on the grounds that, inter alia, SBAR was not an “interested party” because the matter did not involve a formal public-private competition, and, therefore, SBAR purportedly did not suffer the competitive injury necessary for standing under section 1491(b)(1). In advancing this argument, the government relied on the Federal Circuit’s prior decisions in American Federation of Government Employees, AFL-CIO (“AFGE”) v. United States, 258 F.3d 1294 (Fed. Cir. 2001) and Weeks Marine, Inc. v. United States, 575 F.3d 1352 (Fed. Cir. 2009).

Remarkably, in the district court actions where the government moved to dismiss on the grounds that the COFC had exclusive jurisdiction, the plaintiffs in those cases argued that dismissal was not proper because, inter alia, the in-sourcing challenges were not “bid protests” and the plaintiffs were not interested parties to pursue such actions at the COFC. In response, the government asserted that the plaintiffs were in fact interested parties and could demonstrate prejudice because an in-sourcing decision necessarily involves consideration of whether it is in the best interests of the government to contract for its requirements, and contractors interested in bidding on such contracts are affected and suffer injury when the decision is made not to contract. Despite taking a directly contrary position before the COFC, the government further argued in the district court matters that AFGE and Weeks Marine did not support the argument that the plaintiffs lacked interested party status. See, e.g., Government’s Replies to Plaintiffs’ Motions to Dismiss in Rothe Development, Inc. (5:10-CV-00743-XR (Western Dist. Of Tex.)); K-MAR Industries, Inc. (CIV-10-984-F (Western Dist. Of Okla.)); Vero Technical Support, Inc., (10-14162-CIV-GRAHAM/LYNCH (Southern Dist. of Fla)).

In an apparent attempt to reconcile its inconsistent positions on standing to challenge in-sourcing decisions, in an April 2011 filing in Triad Logistics Svs., Corp., which is another in-sourcing challenge pending before the COFC, the government acknowledged to Judge Horn that “the United States’ position with respect to these issues has developed over time.” That seems to be quite the euphemism.

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When the Government was facing a shutdown earlier this year, there was much speculation about the impact to cybersecurity. Certainly, cyberterrorists and other attackers would not stop or delay their attacks just because our Government had shutdown and there was concern that some of the Government’s cybersecurity functions would be shutdown, leaving the United States vulnerable. Luckily, the Government avoided a shutdown, but cybersecurity remains a key consideration in today’s world for all types of industries—including the legal profession.

Indeed, the American Bar Association (“ABA”) has several committees focusing on cybersecurity: The Public Contract Law Section’s Cybersecurity Committee, the Science & Technology Section’s Homeland Security Committee and the Standing Committee on Law and National Security. 

On Monday, May 9, 2011, from noon to 1:00 pm, these ABA committees will host David Delaney, Deputy Associate General Counsel with the Department of Homeland Security (“DHS”), in a joint teleconference program focusing on the latest developments in cybersecurity facing the DHS. Mr. Delaney’s responsibilities include advising senior leaders and program officers on legal and policy issues regarding the Department’s cybersecurity, infrastructure protection and related matters. 

The program will be hosted by David Z. Bodenheimer, a partner with Crowell & Moring LLP and is sure to contain the key information you need to know about the latest developments in cybersecurity. 

Dial-in Information:

1-866-279-5008

Passcode: 2026242713

Home Depot was sued in 2008 by two whistleblowers claiming that the company had violated the False Claims Act by selling products that did not comply with the Trade Agreements Act (“TAA”) to the U.S. government through its GSA Schedule contract. The United States has not intervened in the case. Home Depot recently moved for reconsideration of the court’s denial of its motion to dismiss the allegations. In denying Home Depot’s second attempt to get the complaint dismissed, the court carefully walked through the elements of False Claims Act liability and determined that the complaint was properly pled. U.S. ex rel. Scott v. Actus Lend Lease, LLC et al., Case No. 2:08-cv-07940 (Apr. 22, 2011 C.D. Cal.).

For example, the court determined that the complaint sufficiently alleged facts demonstrating the submission of false claims, by finding that the qui tam relators (i.e., whistleblowers) had provided a spreadsheet listing 118 representative examples of transactions involving products sold to particular government customers that were manufactured in non-designated countries. The court rejected Home Depot’s argument that its claims for payment themselves did not explicitly misrepresent compliance with the TAA, and relied on well-established case law holding that requesting payment for goods or services of lesser quality than those ordered by the government or that failed to meet contractual requirements or specifications can also constitute false claims for payment. Note that this case differs from other recent False Claims Act actions against GSA Schedule contractors alleging TAA non-compliance, e.g., the Folliard case, which were dismissed because the relators failed to show that the government had actually purchased the non-compliant products. 

The court then determined that the complaint contained facts to support the allegation that Home Depot knowingly presented the false claims to the government because the relators had alleged that, although Home Depot knew that its GSA Schedule contract required compliance with the TAA and that it sourced products from China, a TAA non-designated country, the company knowingly failed to “institute any mechanism” to ensure that TAA non-compliant items were not sold off its Schedule contract to the government. 

It is vitally important for GSA Schedule contractors to ensure, both at the start of contract performance and on a regular basis throughout the life of the contract, that items offered for sale to the government are compliant with the Trade Agreements Act. Implementing a process through which a Schedule contractor investigates at regular intervals the source of products listed for sale on its Schedule contract is advisable. Often times companies change suppliers, or suppliers themselves change their sources of products, so even if a Schedule contractor ensures at the start of its contract that all listed products are TAA compliant, it should not assume its Schedule is TAA compliant going forward. Particularly given the five year (or more) duration of a GSA Schedule contract, there can be numerous changes in the supply chain leading to TAA non-compliance. Conducting regular and on-going due diligence on the country of origin of products offered for sale on a GSA Schedule contract will go a long way toward protecting the contractor from a viable False Claims Act allegation.

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There have already been a number of high profile small business enforcement actions this year, an enforcement trend we discussed in our April 7 webinar, and a conviction from a federal jury in New York is the latest sign that this trend is continuing. 

Between June 2007 and June 2010, John Raymond Anthony White’s company, Mitsubishi Construction Corp., obtained four contracts set aside for veterans or service-disabled veterans with the Department of Veterans Affairs for construction work in New York, Pennsylvania, and Maryland. Mr. White used his alleged military status as a service-disabled veteran to establish Mitsubishi Construction Corp.’s eligibility for competing for and receiving these contracts. 

However, there was one problem—Mr. White never served in the military and lied about his status as a service-disabled veteran. When the contracts came under investigation, Mr. White compounded the problem by trying to hide the fraud by claiming that an Army veteran actually owned 51% of Mitsubishi Construction Corp. In doing so, not only did Mr. White fail to cover up the fraud, but he found himself facing additional charges for lying. On April 20th, he was convicted of fraud and lying for his actions and now faces a maximum of 75 years in jails and a possible fine of $3.75 million. He will be sentenced on July 20, 2011. 

Although this is a case of egregious fraud, it is worth noting that companies should always take care to verify their size and eligibility status for every contract they bid on. Even making an innocent incorrect certification can have devastating consequences.