A D.C. district court applied recent Supreme Court and Sixth Circuit decisions in a qui tam case alleging fraud on the SBA’s HUBZone program and employment retaliation. Applying the Supreme Court’s holding in Strock, the court found that the government’s pre-award scrutiny of a contractor’s HUBZone eligibility and its interest in awarding contracts to businesses in economically disadvantaged areas both cut in favor of the materiality of the defendant’s allegedly fraudulent certification of eligibility for set-asides. The court also applied the Sixth Circuit’s definition of employee to the relator’s retaliation claim, holding that the FCA’s anti-retaliation language includes post-employment actions.
United States District Court for the District of Columbia No. 18-cv-2080 (APM), William Smith v. Athena Construction Group Inc.
In brief
A D.C. district court agreed to dismiss some defendants from a qui tam case alleging fraudulent inducement to award HUBZone set-aside contracts. While the relator alleged the defendants knowingly awarded subcontracts to a sham HUBZone business to meet the requirements of their small business contracting plans, the court noted that the subcontractor was not included in the proposals for the underlying contracts. Because the alleged fraud did not occur until after award, the co-defendants could not have fraudulently induced the award of the underlying contract.
However, the court allowed the main case to proceed, finding that the relator had adequately pleaded that the subcontractor knowingly falsified its compliance with HUBZone requirements to obtain and maintain its certification and therefore its eligibility for set-aside contracts. Applying the Second Circuit’s holding in Strock, the court found the allegations material to both the government’s decision to award HUBZone set-asides to the contractor and to pay its claims. The court also applied the Sixth Circuit’s definition of “employee” to the relator’s retaliation claim, holding that the FCA’s anti-retaliation language covers post-employment retaliation.
Background
Relator William Smith alleged that his former employer, Athena Construction Group Inc., falsely certified its eligibility for HUBZone set-asides and engaged in a pass-through scheme by which other contractors “hired” Athena as a sub-contractor to meet the requirements of their small business subcontracting plans, but performed the work themselves. In exchange, Athena allegedly accepted kickbacks. The relator also alleged he was retaliated against for filing this action.
The suit named Athena and some of the prime contractors allegedly involved in the pass-through scheme: Balfour Beatty Construction Company Inc.; Barton Malow Company; Component Assembly Systems Inc.; and Commonwealth Wall Systems Inc.
According to the complaint, Athena was formed as a residential remodeling company. The relator alleged that its founders have no construction or engineering background and that the company has very few full-time staff and virtually no heavy construction equipment. Smith also alleged that Athena fraudulently obtained its HUBZone designation by counting non-employees and employees who did not reside in HUBZone areas to meet the 35 percent HUBZone residential requirement.
The complaint identified multiple projects and contracts awarded by the co-defendants to Athena, each of which Smith alleged was tainted by fraud.
The defendants moved to dismiss.
Were the claims barred by the statute of limitations?
Athena argued the claims were untimely. The court concluded that the case was governed by the extended 10-year statue of limitations, and began its analysis by examining when the material facts became known or should have been known by a cognizant government official.
The relator argued that date was July 19, 2016, when a different relator filed an FCA action in the Eastern District of Louisiana. In that case, also filed by Smith, the relator alleged that Athena and others had participated in a similar pass-through scheme in connection with a Hurricane Katrina-related construction project. Athena argued that because more than three years passed between July 2016 and the filing of this complaint, the relator’s case was time-barred.
However, the court disagreed, noting that the case was filed in October 2018, well within the three year limitations period. Athena attempted to move the goal posts, arguing that the complaint was not unsealed until January 18, 2021, but the court was not convinced.
Were the claims against Athena barred by the pubic-disclosure bar?
Alternatively, Athena argued that the FCA’s public-disclosure bar forecloses claims based on the pass-through theory because similar allegations were made against Athena in the relator’s prior action and because the relator did not qualify as an “original source.”
The court agreed that the pass-through scheme allegations were publicly disclosed in that prior action. The relator retained the same counsel and it appeared that the new complaint copied some allegations verbatim from the prior. The court concluded that if the government had investigated these claims, it would have been put on notice of the fraud alleged in this complaint.
In response, the relator argued that his prior complaint focused on a single contract in a single state and failed to meaningfully alert the government to look beyond that specific project. The relator noted that his new complaint identified multiple different subcontracts tainted by fraud.
The court found this argument unavailing. First, the court found the earlier complaint more expansive than the relator suggested, as it referenced additional subcontracts not directly identified in the complaint and accused Athena of not having the requisite expertise to perform. The mere addition of new details was insufficient to overcome the public disclosure bar. The court held that the allegations in the complaint would have allowed the government to uncover the similar fraud alleged here, had it chosen to investigate further, and therefore had been publicly disclosed.
Next the court considered whether Smith qualified as an original source. The court held that the relator did have independent knowledge that materially added to the publicly disclosed allegations. However, the court found no representation that Smith voluntarily provided his information to the government prior to filing his complaint. Therefore, the court held that the pass-through claims against Athena were barred by the public disclosure bar.
The co-defendants’ motions to dismiss
The court found that the relator did not make a plausible fraud in the inducement claim against Athena’s co-defendants. Importantly, Smith failed to plead that any of the subcontracts with Athena were in place before the government awarded any of the underlying contracts. The court reasoned that if the pass-through scheme did not yet exist, it logically could not have induced the government to make any of the contract awards.
The court examined each of the ten contracts in brief to show the temporal impossibility of a causal link. Because none of the pass-through agreements involving Athena predated the government’s contract award to either the prime contractor or Athena (as prime contractor), the court concluded that the failure to disclose such agreements could not have induced the government to award the contract in question.
Should the relator be given leave to amend?
The court denied the relator’s motion for leave to amend and dismissed the pass-through scheme allegations with prejudice. The court noted that the relator had failed to make his case, even though this was his fourth amended complaint. Further, the relator’s motion made only a cursory request to address any deficiencies identified by the court, without providing any detail of what information the relator might add.
Were Athena’s HUBZone certifications material?
Next, the court turned to the remaining claims against Athena. The relator alleged that Athena impliedly certified its compliance with HUBZone regulations when it sought payment under its HUBZone set-aside contracts. According to the relator, Athena made thirty-one payment requests pursuant to its HUBZone certification, while failing to disclose the fact that it was not actually in compliance with the relevant HUBZone regulations.
Athena argued that these certifications were not material to the government’s payment decision. The district court disagreed, citing the Second Circuit’s decision in U.S. v. Strock, in which the government pursued an FCA case against a contractor who it alleged had fraudulently used an SDVOSB certification to receive millions of dollars of federal government contracts.
In that case, the court concluded that the “payment decision” encompassed both the government’s initial decision to award a contract and its later decision to pay claims. In Strock, the court held that the defendant’s representation of its SDVOSB eligibility was an express condition of payment, as the initial award eligibility was conditioned on this factor. The court also noted the numerous steps the government takes to verify SDVOSB eligibility prior to award. Taken together, the Second Circuit concluded that the government does not award contracts to companies that it knows not to have complied with SDVOSB requirements. The court also found the noncompliance substantial, as it cut to the heart of the government’s intention to award contracts to actual SDVSOBs.
The court found these cases plainly similar. Applying the Second Circuit’s reasoning in Strock to this complaint, the district court reached the same conclusion.
Athena disputed the number of contracts, noting a contradiction between the number of underlying contracts and the subcontracts, but the court found the exact number irrelevant to the allegations that Athena certified as a HUBZone business when it was not.
The court also found the government’s general pre-award conduct supporting a finding of materiality, as there is a rigorous process a contractor must negotiate to become certified. The court also took judicial notice of SBA’s regulations, which outline the initial certification process and ongoing monitoring. According to the court, that pre-award scrutiny supported a plausible inference that the government would not award contracts to entities it knows not to be HUBZone businesses.
As in Strock, the court found the noncompliance substantial, given the government’s interests in awarding contracts to businesses that are headquartered in and employ individuals residing in financial disadvantaged areas.
In sum, the court found the relator made his case for materiality.
Did the relator meet the particularity standard?
Given its review, the court found the relator won the particularity argument. The complaint described how Athena misrepresented the number and overall percentage of employees who resided in HUBZone areas in each of the seven years covered by the complaint. The relator also linked the HUBZone contracts to these dates, with contract numbers, agency, dates, and values. The court found this more than sufficient.
The retaliation claim
Athena also moved to dismiss the relator’s claim of retaliation, arguing that post-employment retaliation is not protected by the FCA.
The court disagreed, noting a circuit split on this issue. While the Tenth Circuit previously ruled that the anti-retaliation provision does not apply post-employment, a more recent ruling by the Sixth Circuit held that it does. That court relied on the Supreme Court’s decision in Robinson v. Shell Oil Co., which held that the term “employee” under Title VII could be read to refer to both current and former employees. While the term employee in the FCA’s anti-retaliation language is ambiguous, the court found that the provision’s broader context and its primary purpose compelled a conclusion that the term included former employees. The district court was persuaded by the Sixth Circuit’s analysis.
Athena also argued that is was not on notice of the protected activity, but the court rejected this contention. Athena learned of the relator’s activity when it was served with the original complaint, and the retaliatory conduct, including a breach of contract suit, occurred after. The court found the timeline clear.
