The district court granted summary judgment in favor of the defendants in a qui tam case alleging they submitted false claims and statements in relation to their required use of small business subcontractors on a large construction project for the Navy. The relator alleged the defendants knew that several subcontractors on their project were sham pass-through entities created by large business subcontractors, and therefore their small business subcontracting reports were fraudulent. However, regardless of the falsity of the statements, the court found the subcontracting plan and semi-annual reports were not connected to claims for payment and therefore the relator had not alleged conduct that was actionable under the FCA. On the merits, the court found that the defendants relied in good faith on the self-certifications of the small businesses in question and that the defendants had disclosed to the government the nature of the pass-through contracts, the contractors involved, and the management fees added to the contract price. Because the government knew and approved of the arrangements, the court found the relator could not demonstrate materiality or scienter, regardless of his allegations that the defendants knew the subcontractors were sham entities.
Relator Rickey Howard filed a qui tam case alleging that Caddell Construction Company Inc., W.G. Yates & Sons Construction Company, Julian Marie Breslow, and David J. Valdini & Associates P.A. engaged in a fraudulent scheme to submit false claims and statements regarding their use of small business subcontractors in the course of performing a government construction contract. The United States partially intervened to settle civil claims against Valdini, but declined to intervene as to the remaining defendants. Caddell and Yates moved for summary judgment.
In 2008, the defendants formed a joint venture to submit a proposal to NAVFAC for design and construction of the Wallace Creek Regimental Complex at the Marine Corps Base Camp Lejeune in Jacksonville, North Carolina. NAVFAC subsequently awarded the JV a $181 million contract for the project.
The contract incorporated more than 100 FAR provisions, either in full text or by reference. These provisions governed the quality of work and the certifications required of the contractors when submitting requests for progress payments. The provisions also governed the use of small business subcontractors. The subcontracting plan required the defendants to agree to a subcontracting plan with a goal of 77 percent small business participation and various sub-goals for specific small business categories.
Relator Howard is a former estimator and president of operations for Pompano, a large masonry company that bid to perform work on the project. Howard alleged that the defendants made express or implied false certifications attesting to their good faith compliance with the contract’s subcontracting plan, both in their individual subcontracting reports and their monthly progress payment requests. According to the relator, the defendants knew that certain small business subcontractors had been established as pass-through companies and did not qualify as small businesses.
The defendants argued that their individual subcontracting reports did not constitute claims for payment, therefore any allegedly false certification as to compliance was not actionable under the FCA. The court acknowledged that the individual subcontracting reports do not themselves seek a payment of money, and are not submitted as part of the monthly progress payment requests through which defendants sought payment for their work.
The plaintiff argued that the reports were related to the claims for payment and were required under the contract. However, the court disagreed, explaining that the standard is whether the statements are made expressly as part of a false or fraudulent claim. The relator urged the court to consider a fraud in the inducement theory, which allows a claim where a certification is made before the actual claim for payment. However, the court explained that this theory goes to contract formation, not contract management. Because the plaintiff did not allege that the defendants obtained the contract itself through false statements or fraudulent conduct, the court declined to consider this theory.
In sum, the court held that the statements in the individual subcontracting reports did not provide a basis for False Claims Act liability.
Next, the court considered the claims involving the defendants’ requests for monthly progress payments. The court found the requests did not identify compliance with the terms and conditions of the Subcontracting Plan or FAR 52.219-8 as a prerequisite of payment and defendants did not certify compliance with those contract terms and conditions. Therefore, the court held that the general certification in the monthly progress payment requests did not provide a basis for False Claims Act liability under an express certification theory.
Citing Escobar, the plaintiff urged the court to reject this limitation on express certifications, but the court explained that Escobar did not alter the test for express certification, but recognized the theory of implied false certification. The court then addressed whether the plaintiff had met the requirements for an implied false certification theory as described in Escobar.
The court noted the test has two prongs that must be satisfied: (1) the claim does not merely request payment, but also makes specific representations about the goods or services provided; and (2) the defendant’s failure to disclose noncompliance with material statutory, regulatory, or contractual requirements makes those representations misleading half-truths.
The court found the relator’s claims failed the second prong of the test. Specifically, while the monthly progress payment requests made specific representations about the work provided, the defendant did not fail to disclose noncompliance with material statutory, regulatory, or contractual requirements that made its representations misleading half-truths. The court concluded that small business certifications in individual subcontractor reports are neither “core” nor “basic” requirements of the work provided under the contract.
Accordingly, the court found the relator failed to demonstrate that the defendants made false claims for payment, and dismissed the first three claims under the FCA.
Alternatively, the court also found the plaintiff failed to demonstrate that the alleged noncompliance was material. First, the court found that the government did not expressly identify compliance with the subcontracting plan and FAR 52.219-8 as a condition of payment. Instead, the applications for payment focused on the work being completed in compliance with contractual requirements. Second, the court noted that the subcontracting plan and reports were submitted and evaluated separately, in accordance with different rules and procedures. Further, the reports were submitted twice annually, not monthly with the progress payment requests. The reports also did not identify work performed, particular types of subcontracts, or particular subcontract amounts.
Third, the court found that the certification in the individual subcontracting reports, and the consequences of certification are much different from the certification in the monthly progress payment requests. The subcontracting report certification attests to the accuracy of the report. If the contractor cannot attest to the report’s accuracy, it is rejected, but the government does not cease work on the project or halt payment. Relatedly, failure to comply with the subcontracting plan is assessed at project completion, at which point the government may assess liquidated damages in an amount equal to the actual dollar amount by which the contractor failed to achieve each subcontract goal. Again, the court found this penalty unconnected to the progress payments.
Fourth, the government’s payment history and continued contracting relationship with the defendants undercut the materiality of the noncompliance. After the government filed criminal charges against co-defendants Valdini and Brewlow for their role in creating the sham pass-through entities, the agency continued accepting subcontracting reports from Caddell and Yates. Notably, both reports disclosed the error in classifying Breslow’s business as a small business and both disclosed that Caddell was not meeting its small business plan goals.
Despite the disclosures, the government continued making payments. The court also noted that the government used the contemplated administrative process to evaluate the noncompliance with the subcontracting goals, and discussed levying liquidated damages. The government did not take other action to withhold or claw back progress payments. Further, the government continued to award contracts to Caddell.
Finally, the court noted that there was no evidence the defendants believed that noncompliance with a small business contracting plan was material to the decision to pay their progress payments. There was also no evidence any government official told them otherwise.
The relator argued that the contract expressly declared that the subcontracting plan is a “material part” of the contract, but the court explained that being a “material part” of a contract does not mean the element is material to the payment decision. While compliance with the plan was important to the government’s management, it did not factor into its decisions to issue progress payments.
The relator also cited to a “presumed loss rule” in the Small Business Jobs Act as an indication of materiality. The statute provides a presumption of loss to the government when a contract set-aside is awarded to an other-than-small business that willfully sought and received the award by misrepresentation. However, the court found this irrelevant to the question of materiality in the FCA context. The cases cited by the relator involved fraud at contract formation and breach of contract, neither of which was alleged here.
Finally, the relator argued that materiality was demonstrated by the felony prosecutions of Breslow and the Valdini Law Firm for making false statements in certifications of compliance with Small Business Act regulations. The court acknowledged the seriousness of the misrepresentations, but found they undermined the relator’s cause. Notably, despite the government’s awareness that the whole subcontract with Breslow Construction was tainted by serious fraud, the agency did not stop payments or demand repayment of progress payments, and the government did not intervene in this case. Instead, the agency used the defined administrative process to evaluate whether the defendants made good faith efforts to comply with the subcontracting plan.
Alternatively, the court also found the relator failed to demonstrate scienter. In relation to the scienter test, the court considered the two categories of false claims asserted by the plaintiff: 1) those arising from categorizing Breslow Construction as a small business, and 2) those arising from treating “pass-through” subcontracts as small business subcontracts.
The court found the first claims failed because there was no dispute that the defendants obtained self-certifications from Breslow Construction and its attorney, and then relied upon those self-certifications in good faith. The FAR expressly provides that a contractor acting in good faith may rely on the written representation of its subcontractor regarding the subcontractor’s status, without extensive inquiry.
The defendants obtained a certification from Breslow—which warned of potential criminal penalties for noncompliance—and relied on this certification in good faith when it included awards to Breslow in its subcontracting goals reporting. The court found no indication of unreliability or fraud in the completed certification and noted that communications included Valdini in its role as counsel. For its part, Valdini advertised itself as well-versed in government contract law and compliance. The court found that the defendants’ representatives took reasonable steps to meet a standard of good faith reliance on Breslow’s certifications.
The relator argued that the defendants were aware that Breslow was also owner of his employer, Pompano Masonry, a large business, because they had received corporate documents to that effect. They also allegedly knew that Breslow and Pompano had created Breslow Construction.
However, the court found the self-certifications still determinative. Regardless of the information previously received by defendants about Breslow Construction and Pompano Masonry, and the individuals involved in creation of Breslow Construction, the self-certification letters by their contents and context provide a basis upon which the defendants could rely in good faith in making Small Business certifications. The defendants’ representatives had no reason to believe that Pompano Masonry’s lawyers were incompetent or corrupt, or that Pompano Masonry and its lawyers had not worked through applicable affiliation rules. According to the court, possible prior affiliations between Pompano Masonry and Breslow Construction do not create an inference of bad faith, where the FAR provide that a newly formed business can rebut affiliation with an existing large company, and the affiliation rules are complex.
The relator also alleged that the defendants pressured Pompano to identify a small business entity by delaying payments. However, the court found this pressure did not show that the defendants knew that Pompano would create a sham pass-through business.
The relator cited internal communications between the defendants’ employees, in which they suggested that Breslow and Pompano were the same entity. However, the court found the emails were in the context of accounting for payment, not certification of Breslow as a small business. The court also found these statements did not outweigh the self-certifications. Accordingly, the court found the relator had not demonstrated scienter.
The relator also alleged that the defendants made false certifications of compliance with the small business plan by treating “pass-through” subcontracts as small business subcontracts. As an initial matter, the complaint did not establish that the defendants knew or should have known certifications based upon pass-through subcontracts were false, because their classification under the terms of the contract and the FAR was unsettled.
The court found the contract did not mandate self-performance by small business subcontractors, but expressly incorporated the full text of FAR 52.236-1, which provides that the contractor shall perform on the site work equivalent to at least 20 percent of the total amount of work to be performed under the contract. In contrast, the contract was silent on self-performance by subcontractors.
Howard argued that each subcontractor was required to self-perform at least 20 percent of the total value of its contract, which included reference to FAR 52. However, the court found this was not the only reasonable interpretation. The contract incorporated 104 provisions of the FAR by reference, as well as a provision expressly applicable to the contractor, so the court found it reasonable to interpret the contract as being silent as to requirements for subcontractor performance requirements for each subcontract.
Regardless, the court held it need not determine as a matter of law whether the contract did or did not require subcontractors to perform at least 20 percent of the work under each subcontract, but rather only whether defendants’ knew or should have known that it did. The court found no evidence the defendants had been warned away from interpreting the contract to allow pass-through subcontracts. Rather, the defendants disclosed to the government both the concept of pass-through subcontracts to the government and specific pass-through subcontracts, but received no warning away from this approach.
The court cited to various communications between the defendants and the government describing the pass-through arrangements, in which the government indicated the arrangements were acceptable. The court also noted that the defendants submitted numerous change order pricing proposals for NAVFAC review and approval showing that first-tier small businesses were further subcontracting the work to second tier-large businesses, in exchange for a 1-2 percent management fee. The court found no evidence the government objected to these arrangements. While the relator asserted that the small business representatives performed little or no work in exchange for that management fee, the court found that to be a matter of contract management or garden variety fraud, not conduct actionable under the FCA.
Next, the court granted summary judgment on the count alleging liability for reverse false claims. As the relator had not demonstrated the defendants had any obligation to pay or repay any amounts to the government. The relator argued the defendants improperly retained funds to which they were not entitled and improperly avoided paying liquidated damages for failing to meet the goals of their subcontracting plan. The court already found the first had not been proved. As to the latter, the court noted that the assessment of liquidated damages is dependent on the agency’s discretion and therefore damages are not an established obligation. Further, the court again noted that the progress payments were not tied to subcontracting goals.
The court also granted summary judgment on the relator’s kickback claims. The relator alleged the defendants paid kickbacks to Pompano and Breslow, falsely stated that they had in place reasonable procedures to prevent kickbacks, and then included the amount of kickbacks in their invoices. Specifically, the relator suggested that the defendants paid Breslow Construction 2 percent more than it was going to pay Pompano Masonry in the original masonry subcontract as a “kickback” to induce Pompano Masonry to use Breslow Construction as a sham small business.
The court found the relator failed to tie this allegation to a false claim for payment expressly or impliedly conditioned upon compliance with the Anti-Kickback Act. Plaintiff has not demonstrated that any certification of compliance with the Anti-Kickback Act was material to the government’s decision to pay under the monthly progress payment requests, nor demonstrated a genuine issue of fact as to scienter. The court also held that the relator’s stand-alone claim for a violation of the Anti-Kickback Statute failed, as the AKS does not provide an individual cause of action on the government’s behalf.
