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The district court denied a motion to dismiss the government’s complaint alleging that a contractor misrepresented itself as a service-disabled, veteran-owned small business in order to obtain contract set-asides. The defendants argued they should be dismissed from the case, as the government had not alleged that they had submitted any false claims for payment, nor that the defendants knew that the purported SDVOSB was not eligible for set-asides. However, the court found the government adequately alleged that one individual acted as both an employee of the sham SDVOSB and the defendant, and was acting in the scope of his authority at both entities when causing the SDVOSB to submit false claims. Thus, the defendant company was subjected to vicarious liability. The defendants also sought to dismiss the claims of unjust enrichment and payment by mistake, arguing that the government had not made any payments to them, but only to the sham SDVOSB. However, the court noted the complaint alleged that the SDVOSB made various payments to the defendants, which they would not have received but for the fraud.

On remand from the Second Circuit, the district court again took up the government’s complaint against Lee Strock and Strock Contracting, in which it alleged the defendants defrauded the government in connection to contracts intended to be set aside for service-disabled veteran-owned small businesses.

The government alleged that the defendants knowingly misrepresented that their company, Veteran Enterprises Company Inc., qualified as an SDVOSB in order to obtain and profit from construction contract set-asides. The district court initially dismissed the government’s complaint after concluding that the government had not adequately pleaded that the alleged misrepresentation—that VECO qualified as an SDVOSB—was material to the government’s decision to make payments under the awarded contracts or that defendants knew of this materiality. The court also found that the government had not demonstrated that the individually named defendants even knew that VECO was not eligible for set-asides.

The Second Circuit reversed, finding the government had adequately demonstrated that agencies would not have awarded contracts to the defendant had they known it was not eligible for SDVOSB set-asides. The court reasoned that the government’s “payment decision” comprised both the payment of invoices and the decision to award contracts in the first place. The court reversed and vacated portions of the decision and remanded the matter back to the district court.

In its revived motion to dismiss, Strock Contracting again argued that the government had not alleged that Strock Contracting itself submitted any false claims for payment (instead, VECO did), or had the requisite knowledge that VECO was not a legitimate SDVOSB.

In response, the government argued that Strock Contracting is vicariously liable for Lee Strock’s misrepresentations based on respondeat superior. Its theory was that Strock simultaneously acted both as an employee of Strock Contracting and an employee of VECO, and was acting in the scope of his authority at both entities when causing VECO to submit the false claims, thus subjecting Strock Contracting to vicarious liability.

Strock Contracting conceded that a corporate defendant may be held vicariously liable for FCA violations under an agency theory but seized on the government’s use of the term “apparent authority” to avoid liability. The defendant argued that Strock did not manifest Strock Contracting-authority vis-à-vis the government, but rather manifested VECO-authority, since the false claims were submitted by VECO.

However, the court explained that apparent authority is just one form of respondeat superior liability; an employee can also act with actual authority. The court concluded that the allegations suggested that Strock had actual authority, because he partially owned and controlled Strock Contracting and VECO. Therefore, it made no difference which entity’s authority was “apparent” to the government.

Next, the court examined the common law claims. Strock Contracting moved to dismiss the common law fraud claim against it for the same reasons as discussed above, i.e., that the government did not allege that Strock Contracting itself made a material false representation. However, the court denied the motion, for the same reason above, noting that the doctrine of respondeat superior applies to fraud claims.

Lee Strock argued that the government’s fraud claim was insufficient because it failed to allege actual monetary damages and failed to specify the theory by which damages should be calculated. The court was not persuaded, noting that Rule 9(b) does not require that claimants plead injury with particularity, even in fraud claims.

In its complaint, the government alleged that it “sustained damages in an amount to be determined at trial” and the prayer for relief sought a judgment “for an amount to be determined at trial.” Elsewhere in the amended complaint, the government alleged that it paid VECO approximately $21 million on the contracts it fraudulently obtained. The court noted Strock offered no authority suggesting that the damages allegations were insufficient and declined to dismiss the fraud claim on this basis. Further, the court found that the government’s failure to specify the measure by which damages should be calculated was not fatal to its complaint.

Finally, Strock and Strock Contracting argued that the government’s unjust enrichment and payment by mistake claims failed to allege how the defendants unjustly enriched themselves or why the government should be able to recover against them, when the government made payments to VECO, not Strock or Strock Contracting.

However, the court noted that the amended complaint alleged that VECO made various payments to Strock, Strock Contracting, and other entities Strock owned or controlled. Drawing all inferences in favor of the plaintiff, the court found the government sufficiently alleged that Strock and Strock Contracting enriched themselves by receiving payments from VECO after VECO received payments from SDVOSB contracts, and that it would be inequitable to keep the money because it was supposed to have been paid to legitimate SDVOSBs.