The district court denied the defendants’ motion to dismiss a qui tam complaint alleging they purposefully neglected to inform SBA that they had entered into a joint venture agreement and were therefore ineligible for 8(a) set-asides. The defendants argued that the complaint was precluded by the public disclosure bar, because SBA knew they had not submitted a JV agreement for approval and that one of the co-defendants was nonetheless receiving a large share of the profits from the contract. However, the court explained that the disclosure of facts did not mean that fraud had been disclosed. The court also found the relator had adequately pleaded the allegations with particularity and demonstrated that the alleged fraudulent statements were material, as the defendants would not have been eligible to receive set-asides if their JV agreement were disclosed. Finally, the court found the relator adequately pled scienter. Even if the defendants did not purposefully seek to deceive SBA, the court held the relator, at minimum, demonstrated they acted with indifference as to the disclosure of their JV agreement.
Defendant Fargo Pacific Inc. moved to dismiss a qui tam complaint alleging it committed fraud on the Small Business Administration in relation to its 8(a) small disadvantaged business program, arguing that the court lacked jurisdiction and that the relator failed to state a claim.
Ravindra Gogineni alleged that Jay Park, president of Fargo Pacific, secretly contracted with co-defendant Edgar McConnell to perform work on 8(a) set-aside contracts Fargo Pacific obtained through the program. The plaintiff alleged that during the time Fargo was certified under the SBA’s 8(a) program, Fargo awarded McConnell consulting agreements whereby he would perform work on two contracts in exchange for 50 percent of the gross profit. Allegedly, McConnell would also manage all aspects of the project, including pricing task orders, ordering materials, supervising field management, securing warranties, and insuring contract compliance.
The plaintiff maintained that these consulting agreements established a de facto joint venture between Fargo and McConnell with respect to the contracts at issue, which was not disclosed to the SBA as mandated under 8(a) program requirements. According to the relator, this arrangement rendered Fargo ineligible for the 8(a) contracts.
The defendants moved to dismiss, first arguing the complaint was barred by the public disclosure bar. The defendants argued that SBA and the Navy were aware that McConnell received a substantial share of the profit under the delivery orders and that Fargo had not identified itself as a joint venture when bidding for the contracts. Because the facts of the allegations were known publicly, the defendants argued the complaint was barred.
The court disagreed, noting the difference between facts and fact which disclose allegedly fraudulent conduct. Although the defendants identified certain facts that were known—that McConnell was receiving a substantial share of the profit under the IDIQ Contracts—none of the publicly disclosed facts revealed any misrepresentations. Conversely, the fact that Fargo had not identified itself as a joint venture was irrelevant, because none of the publicly disclosed facts would warrant an inference that fraud was committed. The court noted there was no regulation prohibiting McConnell from receiving a substantial share of the profits, and therefore the allegation that the parties had entered into an undisclosed de facto joint venture was materially different from the known facts.
Next, the court turned to the merits of the claim. The plaintiff advanced claims under an implied false certification theory and a promissory fraud theory.
First, the relator alleged that the defendants deceived the government by deliberately failing to disclose that Fargo and McConnell had formed a de facto joint venture with respect to the contracts. In their motion to dismiss, the defendants argued that the relator had not adequately pleaded that McConnell and Fargo entered into a joint venture within the meaning of SBA regulations, and therefore had not pleaded that there was anything misleading about the failure to disclose the details of their agreement.
However, the court found the plaintiff adequately pleaded the existence of a joint venture within the meaning of SBA’s regulations. The consulting agreement attached to the complaint included provisions under which McConnell and Fargo were to combine their efforts and property to carry out the task orders issued under the contract. It also provided that, in lieu of receiving a salary for his efforts, McConnell would split the gross profits from roofing work performed under the contract. Finally, the agreement provided that McConnell would manage all aspects of the project.
The defendants argued that under Defense Contract Audit Agency guidelines, determining whether a joint venture arrangement exists is a fact-intensive inquiry, with no one factor being dispositive. However, the court explained that this very factor meant the matter was not resolvable in a motion to dismiss. Drawing all reasonable inferences in favor of the plaintiff, the court found the complaint plausibly stated that the defendants had formed a JV within SBA’s meaning. Accordingly, the court found that the plaintiff had adequately pleaded falsity.
Next, the defendants argued the plaintiff had not adequately pled scienter, because the complaint lacked factual allegations that would demonstrate that any of the defendants knew that their consulting agreement violated Fargo Pacific’s 8(a) status and rendered it ineligible for the award of the contracts. To the extent the defendants argued the allegations did not conclusively demonstrate scienter, the court explained that this is not the standard on a motion to dismiss. Further, the defendants’ argument also failed because it treated a failure to show “knowledge” that the consulting agreement created a joint venture with a failure to show scienter. The court explained that scienter can be demonstrated by showing that the defendants were deliberately indifferent to whether the Consulting Agreement created a joint venture or that they acted with reckless disregard to whether the consulting agreement created a joint venture.
In that light, the court found the plaintiff had adequately pleaded scienter. They noted that the complaint alleged that Park testified under oath that he hid his profit-sharing agreement with McConnell from the Navy, because he knew that if the Navy found out, he would not get the 8(a) set-aside contracts, and that Fargo would not qualify for minority preferences. Accepted as true, these allegations sufficiently pled scienter.
Next, the defendants argued the FAC failed to adequately plead that compliance with SBA regulations regarding joint ventures was material to the Navy’s decision to pay Fargo Pacific. The defendants argued that, at most, SBA would have had the option to terminate Fargo from the 8(a) program.
However, the relator submitted a letter from SBA to Fargo Pacific, in which SBA notes that an undisclosed, unapproved joint venture agreement would render Fargo Pacific ineligible to continue performance on an 8(a) contract. The plaintiff sought judicial notice of the letter as a matter of public record. The defendants argued that the letter referred to an agreement between Fargo and another company, but the court found that dispute inappropriate for a motion to dismiss. The court found the letter merely corroborated what was already facially plausible from the allegations in the FAC: that the concealment of an unapproved joint venture had a “natural tendency” to influence the government’s payment decision and was therefore material for purposes of the False Claims Act.
Next, the defendants argued the plaintiff had not identified representative false claims or alleged the detail of a scheme. The court disagreed, finding the complaint specifically detailed the agreements between the defendants and how they violated federal rules. The complaint identified the agreements and the specific contracts, as well as Fargo Pacific’s express and implied certifications that it remained eligible to perform under the contracts were false.
Further, the FAC specified the number of task orders the defendants received and the dates and dollar amounts. The court held that these specifically alleged facts were reliable indicia that lead to a strong inference that claims were actually submitted. This inference is strong because, if claims were not actually submitted, it would mean either that Fargo Pacific performed at least some of these task orders without requesting payment for the work or that Fargo Pacific did not perform the work but the Navy continued issuing task orders to Fargo Pacific anyway.
Next, the defendants argued the relator failed to plead his case with particularity, but the court noted that the facts asserted above met the Rule 9(b) standard. Although there could be a genuine factual dispute as to whether the arrangement formed between the defendants constituted a “joint venture” within the meaning of the SBA’s regulations, the court found the plaintiff had pleaded all the details that could reasonably be expected of any plaintiff proceeding under the False Claims Act.
However, the court did agree that some of the claims were barred by the statute of limitations. First, the court agreed that the complaint did not allege that the joint venture existed prior to Fargo entering into the 2006 contract, and therefore the relator could not allege fraudulent inducement or the submission of false claims within the statute of limitations. The court dismissed this count, with leave to amend. The court also agreed that any attempt to impose liability for violations of the False Claims Act occurring before August 24, 2007 was time-barred, and dismissed those counts with prejudice.
