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FBI Raids Firm Accused of DBE Fraud

Posted in Disadvantage Business Enterprises (DBE)

I have previously posted and spoken about the increasing prevalence of DBE fraud investigations and prosecutions.  Usually those investigation are started by the Department of Transportation’s Inspector General’s Office and may lead to the unsealing of an indictment by the Department of Justice.  I have also warned of the growing threat of whistleblower lawsuits related to alleged fraud in the DBE program which sometime lead to a federally directed civil lawsuit against a firm. However, until recently, I have never heard of a whistleblower DBE fraud lawsuit leading to an FBI raid.

Earlier this week, it was reported that the FBI recently raided the offices of a large Tennessee based heavy highway firm after one of its former employees filed a whistleblower lawsuit regarding alleged DBE fraud.  This should be concerning to prime contractors operating under the DOT’s DBE regulations for several reasons.

First, as I predicted, DBE fraud prosecutions, which first  became en vogue in the Southern District of New York, are a growing trend nationally. The story out of Tennessee comes on the heals of recent DBE fraud investigations in North Carolina and Utah, among other jurisdictions. Prosecutors nationwide are focusing on ferreting out DBE fraud.

Second, the raid shows that the risks of a whistleblower lawsuit are both civil and criminal.  I have talked about how whistleblower lawsuits have caused contractors to incur significant damages under the federal False Claims Act for violating the DOT’s DBE rules.  However, in those cases, the damage was almost exclusively monetary.  Now, the risks of a whistleblower lawsuit could include a criminal investigation.

Third, typically a firm being investigated for DBE fraud has some form of advance warning of the investigation.  The warning could be in the form of a letter from the Inspector General’s Office advising the contractor of the investigation, the service of a whistleblower lawsuit on the company, or target letter from the Department of Justice.  However, when the FBI serves a warrant, you do not receive any warning (indeed it would defeat the purpose of the search).  Therefore, failure to follow the DOT’s DBE rules could result in the FBI showing up at your office unannounced and carting off boxes of documents and computers.

With the recent changes in the DOT’s DBE rules and the increased scrutiny of the program by federal authorities, now more than ever construction firms need to be paying attention to DBE compliance.

$650,000 Jury Award Against Sheet Metal Workers Union Affirmed

Posted in Secondary Boycotts, Unions

As I have blogged about before, one of the most powerful weapons contractors and owners have in combating illegal secondary activity by unions is Section 303 of the Labor Management Relations Act.  Section 303 authorizes a party to bring in action in federal court for monetary damages against a labor union who has caused harm because of illegal labor practices.

Late last year the Second Circuit Court of Appeals, which covers appeals from federal courts in New York, Connecticut, and Vermont, affirmed a $650,000 jury award in favor of a commercial sign subcontractor and against Sheet Metal Workers Local 137.  In that case, plaintiff was a commercial sign manufacturer and installer who entered into a contract with a prime contractor to Wells Fargo bank for the installation of new signs at locations throughout the New York Metropolitan area.  Accordingly to the complaint, plaintiff was not a signatory to Local 137 collective bargaining agreement.  Soon thereafter, Local 137 began threatening Wells Fargo because it was permitting the non-union sign company to work on the bank’s projects.  Local 137 engaged in classic illegal secondary activity, such as, displaying inflatable rats at Well Fargo locations, picketing Wells Fargo locations, disrupting deliveries to Wells Fargo, and causing Wells Fargo bad publicity.  Accordingly to the complaint, Local 137’s action eventually led to Wells Fargo insisting that the plaintiff be replaced with a sign company that was signed with Local 137 and plaintiff was replaced on the Wells Fargo projects.

Plaintiff sued Local 137 under Section 303 claiming that it was terminated by Wells Fargo because of Local 137’s secondary activity that violated Section 8(b) of the NLRA.  Section 8(b) prohibits a union from  threatening, coercing, or restraining a business in order to cause that business from doing business with another business.  The jury agreed with the plaintiff and awarded plaintiff $650,000 in damages.

Interestingly, based on the allegation in the complaint, Local 137 actions may not have garnered much attention from the NLRB on an unfair labor practice charge.  Especially in recent years, the NLRB has taken a restrictive view on what constitutes illegal secondary activity under Section 8(b).  Conversely, judges and juries have taken a more expansive view of what constitutes an illegal secondary activity and have not hesitated in awarding significant judgments against unions that violate Section 8(b).

Why the Ironworkers Conviction is Monumental

Posted in Unions

Yesterday’s guilty verdict is the trial of former Ironworkers’ Union President, Joe Dougherty, is a monumental decision with far reaching ramifications.  First, there is no longer any question that union bosses enjoy no immunity from federal racketeering and extortion laws.  Second, the decision clears the way for contractors to employ what has been called the “thermonuclear device” of litigation, civil RICO, against trade unions.

1.  Enmons is Dead.

Thanks to a 1973 U.S. Supreme Court case, U.S. v. Enmons, for over 40 years union bosses and their minions enjoyed de facto immunity from federal criminal charges for actions that would otherwise be criminal so long as they were in furtherance of a “legitimate union objectives.”  Until recently, courts had been loath to reel in the breadth of Enmons.  That changed in 2011 in a decision from the federal court in New York in the case U.S. v. Larson, where the court refused to dismiss an indictment of members of the Operating Engineers Union, who engaged in activity similar to that in the Ironworkers case.  In that case, the court distinguished Enmons and said that decision was never meant to apply to acts of violence and extortion against non-union construction companies and project owners, who chose to build non-union.  That decision paved the way for a series of guilty pleas from members of Operators in the case.  In the Ironworkers’ case, Judge Baylson reached a similar conclusion and it paved the way for the conviction of Joe Dougherty.

Thus, there is now no question that acts of violence and extortion are no longer protected under U.S. v. Enmons and unions can no longer hide behind that decision in escaping prosecution for their crimes.  Last year, it was reported that the U.S. Attorney in Philadelphia was making cases, like the Ironworkers case, a priority. Moreover, at the news conference initially announcing the indictment over a year ago, the U.S. Attorney was explicit that the case may not stop with the Ironworkers’ Union.  Indeed, as any non-union contractor working in Philadelphia knows, the allegations against the Ironworkers’ Union were hardly unique to that specific union.  There is no doubt that Ironworkers’ case was a test case for the Department of Justice here in Philadelphia and we should not be surprised if similar indictments are unsealed against other members of the building trades.

I am sure there is a bit of Hoya paranoia happening in the Philadelphia building trades right now, but that paranoia may soon spread nationally because U.S. Attorneys’ like to bring “copy cat” cases in other jurisdictions.

2.  Civil RICO Claims.

What is perhaps the bigger ramification of the Ironworkers’ conviction is contractors are now “cleared hot” to bring civil RICO claims against trade unions.  Joe Dougherty was prosecuted under the Racketeer Influenced and Corrupt Organizations Act, otherwise known as RICO.  RICO is a Nixon era body of laws that was passed with the intention of fighting the mafia and other organized crime syndicates.  The RICO act has both a criminal and civil component.  The civil component requires a plaintiff to prove most of the same elements of a criminal RICO claim. The civil component also permits the court to award a plaintiff trebel (triple) damages and attorneys fees.

The reason why contractors did not likely have a viable RICO claim before the Ironworkers’ conviction involves a bit of background on what is required to prove a RICO claim.  (RICO is a very complex area of the law. The complexity of RICO is probably why it took the jury in the Ironworkers case a few days to come back with a verdict.)  A fundamental element of a RICO claim is that the defendants must have committed a RICO “predicate act” which are set forth in the RICO act.  Simply put, if you have no predict act you have no RICO claim.  Predict acts include murder, gambling, mail fraud, wire fraud, and money laundering.

The RICO predicate act most likely triggered by union strong arm tactics is the Hobbs Act, which makes it a federal crime to conspire to commit extortion.  For example, Joe Dougherty was convicted of violating the Hobbs Act.  The problem before the Ironworkers’ conviction was that the Enmons case foreclosed a civil RICO claim against a trade organization because Enmons held that the Hobbs Act was not violated so long as a union was furthering legitimate objectives.  However, now that Enmons is dead and a violation of the Hobbs Act does occur when unions commit extortion against non-union contractors and the owners that hire them, the path is cleared for contractors subjected to that extortion to bring a civil RICO claim against the union.  Civil RICO claims are expensive to defend and they give aggrieved contractors the first real weapon with teeth to combat union intimidation.   I would not be surprised if the contractors that were harmed by the Ironworkers do not file civil RICO claims against the Ironworkers’ Union in the near future.

Does My Collective Bargaining Agreement Prevent Me From Opening a Non-Union Company?

Posted in Unions

In short, no.  However, that short answer is not so simple and does not mean you can run and opening a non-union company.  Almost all construction industry collective bargaining agreement contain clauses that attempt to prevent a signatory firm from operating a non-union firm.  These clauses are commonly known as anti-dual shop or double-breasting clauses.  However, whether such clauses are valid and enforceable depends on a two part test.

First, the clause in question must seek to preserve work performed by the employees represented by the union.  In other words, the clause seeks to prevent an employer from circumventing its bargaining obligations.  Second, the contracting employer must have control over the non-union entity.  This second prong is called the “right of control” test.

Determining whether an anti-dual shop clause is facially valid – that means whether it can even be applied – often depends on the nuanced language of the clause and whether the clause is being interpreted by a court or the NLRB.  For example, in N.L.R.B. v. Central Regional Counsel of Carpenters, the Third Circuit Court of Appeals (which governs NJ, PA, DE, and the Virgin Islands) invalided the following anti-dual shop clause:

“The employers stipulated that any of their subsidiaries or joint venture to which they may be parties when such subsidiaries or joint venture engage in multiple dwelling, commercial, industrial, or institutional building construction work shall be covered by the terms of this agreement.”

In that case, the Court held that the clause failed the first prong of the test because it broadly applied to all “construction work” in various types of dwellings.  The Court held that it violated the second prong because it applied to all subsidiaries or joint ventures not just those the employer controlled.

Conversely, the NLRB in Rd. Sprinkler Fitters, Local 669 (Cosco Fire Protection), the NLRB held that an anti-dual shop clause that applied to separate entities that the signatory employer “established and maintained” was facially valid because it passed the second prong right of control test.

Yet, whether an anti-dual shop clause is facial valid does not end the inquiry because a union seeking to enforce the clause would still bear the burden of proving that employer “controlled” the non-union affiliated entity.  Thus, even in the face of an anti-dual shop clause, a non-union entity can still be established if it is truly independent from the union firm.  The factors the Courts and the NLRB use to determine whether the two operations are intertwined include (a) whether the primary purpose of the establishing of the non-union firm was to circumvent the CBA, (b) common ownership, (c) common management, (d) common employees, and (e) common location.

5 Construction Law Trends to Watch in 2015

Posted in Construction Labor Law, Government Contracts, Infrastructure Construction, Mechanics Liens, Public Contracts, Public Private Partnerships (P3), Unions

As we enter the New Year, here is a look at 5 areas that will be a hot bed of legal activity for contractors and their attorneys.

1.   Aggressive Union Activity.

Decreasing membership and market share, will cause Big Labor to ramp up efforts to “persuade” public and private owners to use an all union workforce.  This means increased picketing, bannering, and “ratting” of projects using non-union subcontractors.  On public projects, labor will continue to lobby government officials for the use of union only project labor agreements.  Owners and contractors need to be ready to combat labor’s tactics.

Union shop firms must be aware of their contribution requirements under their CBA.  The 2008 stock market crash (from which union pension funds have never full recovered), increasing vested liabilities from an aging workforce, and decreasing membership have lead many union health and welfare funds to be underfunded.  In fact, union pension funds may be the next big Washington bailout.  In the meantime, unions will aggressively pursue delinquent  contractors for contributions to health and welfare funds.

In Philadelphia (and perhaps around the country), eyes will be on jury’s verdict in the Ironworkers extortion trial involving former Ironworkers head, Joseph Dougherty.  A conviction could lead to a wave of indictments against union leaders that have engaged in similar tactics across the country.

2.  Increased Regulation of Contractors.

President Obama’s policy of creating a regulation nation continues unabated.  In 2014, the Obama administration issued 78,978 pages of new federal regulations many which impact contractors.  Any contractor or subcontractor performing work on a project receiving any form of federal funding assistance must be aware of the regulations that apply to them.

3.  Rising Default Rates.

With the federal reserve signaling the era of free money coming to an end, interest rates will rise.  Rising rates will make borrowing costs higher for both owners and contractors. Increased borrowing costs could lead many contractors to fail, especially firms that saw rapid expansion following the recession.  Owners may increasingly default as projects are increasingly difficult to finance.  Moreover, rising rates should slow the rapid increase in asset values, such as real estate.  This could make development projects less attractive leading to many proposed projects being shelved.  Bottom line for contractors, know you lien and bond rights.

4.  Growing Comfort with Public Private Partnerships.

Cash strapped state and local governments will continue to look to public private partnerships (PPP) as a way to fund infrastructure projects.  The success of high profile (and dollar) PPP projects in Florida, Pennsylvania, and Delaware will likely determine if the use of PPP as a source of infrastructure funding will increase in coming years.

5.  Continued Growth in Health Care and Institutional Construction.

Whether you agree with it or not, our current public policy is that everyone has a right to a college degree and healthcare.  Accordingly, the federal government has heavily subsidized higher education and healthcare.  Increased dollars in the hands of administrators in higher education and healthcare has lead to a building boom in these two sectors.  Eventually the music will stop, but in the near term contractors can expect increased work in these areas.

What the $42 Billion Multi-Employer Pension Fund Deficit Means for the Construction Industry

Posted in Withdrawal Liability

On November 17, 2014, the federal Pension Benefit Guaranty Corp released a dire report for multi-employer pension funds – they are chronically underfunded to the tune of $42.2 billion.  As ENR reports, nearly 4 million workers in the construction industry are covered by multi-employer plans and the construction industry accounted for 55% of all multi-employer plans.

These facts will have two major consequences for employers participating in multi-employer pension plans. First, union trustees will become increasingly aggressive toward delinquent employers. I have already seen an uptick in collection claims brought against union construction firms, including against firms that are solvent, that have a strong payment history into the funds, and are otherwise dedicated to employing union labor.

Second, ERISA withdrawal liability will continue to be a big issue for employers that decide to rescind their collective bargaining agreement, merge with a non-signatory firm, or simply go out of business.

Under ERISA. an employer who completely withdraws from a multi-employer plan may be liable to the plan for vested, yet unfunded, benefits for its employees. For construction industry employers, a complete withdrawal occurs only if an employer “ceases to have an obligation to contribute under the plan,” and the employer “(i) continues to perform work in the jurisdiction of the collective bargaining agreement … or (ii) resumes such work within 5 years … and does not renew the obligation at the time of the resumption.”

Withdrawal liability can be significant especially for contractors that have been in business for many years and, thus, share a portion of vested benefits.  Withdrawal liability can follow through to a successor corporation or personally to the individual shareholders and officers of the withdrawing corporation.

The take away:  stay current on your benefit contributions and assess potential withdrawal liability before ending operations or merging with a new firm.

DOT Issues Final DBE Rule Changes

Posted in Construction Law, Disadvantage Business Enterprises (DBE)

Over two years ago, the Department of Transportation published notice that it intended to make changes to the federal regulations governing the DOT’s Disadvantaged Business Enterprise program.  After an extended comment period, today, October 2, 2014, the DOT issued the final DBE rule changes. These changes become effective November 3, 2014.  The changes impact five areas of the DBE program:  certification standards and procedures, goal setting, good-faith efforts and documentation, counting, and contract administration. Here is a look at some of the highlights of the changes as they impact prime contractors.

1.  Good Faith Effort Documentation.

The DOT has made changes to the DBE rules related to the submission of information regarding DBE participation.  The good news is that the changes do not go as far as the DOT intended to go when it issued its proposed rule.  Under the proposed rule change, the DOT would have required prime contractors to submit supporting documentation concerning DBE participation that was being used towards meeting or exceeding the DBE goal at the time of bidding and as a matter of bid responsiveness.  Prime contractors, major trade subcontractors, and trade organizations such as the American Road & Transportation Builders Association (ARTBA) and the AGC all loudly objected to the proposal.  Their objections appear to be at least somewhat successful.

Under the new rule, an apparent low bidder is mandated to submit DBE information to the transportation agency within seven days after bid opening.  Failure to submit this information within the seven day time period may result in the bid being rejected.  (Readers of this blog will note that the Commonwealth of Pennsylvania recently issued a similar rule on 100% state funded projects.)   However, at the description of the transportation agency, this information may be required at the time of bidding.  Bottom line: review your bid specifications carefully.

2.  Good Faith Efforts When Replacing a Terminated DBE

It has long been the rule that when terminating a DBE subcontractor, the prime contract must (a) get the permission of the transportation agency, and (b) engage in good faith efforts to subcontract the same percentage of work of the terminated DBE to other DBE firms.  The rules now extend the documentation efforts required after bid opening to replacement of terminated DBE firms.

Under the new rules, within seven days of terminating a DBE firm, the terminating contractor must submit documentation to the transportation agency of its good-faith efforts to replace the terminated DBE with a DBE.  Because the time period begins to run once approval of termination is given by the agency, contractors need to begin documenting replacement efforts well in advance of the request for termination.

3.  DBE Regular Dealers

The counting of DBE material suppliers as part of a prime contractor’s DBE goal has been an area of consternation for prime contractors ever since the DOT issued guidance in 2011 on DBE acting as a regular dealer v. brokers.  Under that guidance, a supplier qualified as a “regular dealer” of items on one project would not necessarily qualify as a regular dealer on a different project. In the guidance, the DOT provided the following example: “a firm that acts as a regular dealer on Contract #1 may act simply as a “transaction expediter” or “broker” on Contract #2. It would receive DBE credit for 60 percent of the value of the goods supplied on Contract #1 while only receiving DBE credit for its fee or commission on Contract #2.”  In other words, the DOT required prime contractors to address the regular dealer issue on a contract by contract basis.

Under the new rules, that guidance is now codified.  The significance of this is an issue of legal precedent.  Courts give greater deference to codified rules than they do agency guidance.

4.  DBE Trucking.

The counting of DBE trucking services has always received special treatment under the rules. Under the old rules, a DBE trucking firm could lease trucks from a non-DBE firm and receive credit for the value of the services leased from the non-DBE firm in an amount equal to the value of the services the DBE is self performing.  The example the old regulations gave was as follows:

“DBE Firm X uses two of its own trucks on a contract. It leases two trucks from DBE Firm Y and six trucks from non–DBE Firm Z. DBE credit would be awarded for the total value of transportation services provided by Firm X and Firm Y, and may also be awarded for the total value of transportation services provided by four of the six trucks provided by Firm Z. In all, full credit would be allowed for the participation of eight trucks. With respect to the other two trucks provided by Firm Z, DBE credit could be awarded only for the fees or commissions pertaining to those trucks Firm X receives as a result of the lease with Firm Z.”

Under the new rules, in addition to the above scenario, if the trucks are leased from a non-DBE firm but operated by employees of the DBE firm then full value for the leased transportation services may be counted to towards the goal without regard to the ration scenario.

5.  DBE Rules Administration

Many state agencies, including PennDOT, include language in a prime contractors contract that require it to administer its contract and subcontracts according to the DBE rules and that makes a failure to do so a material breach of contract.  The new rules require that all agencies adopt similar language in their prime contracts.

Prime contractors now have even more incentive to know and understand the DOT’s DBE rules.

Regional Manager Indicted in DBE Fraud Case

Posted in Disadvantage Business Enterprises (DBE)

In previous posts, I have discussed how failing to abide by the Department of Transportation’s DBE regulations can lead to the criminal indictment of construction company executives. Now, a case out of the Southern District of New York – a hotbed of DBE fraud prosecutions – should have all employees of a firms that fail to understand the ramifications of failing to follow the DOT’s DBE rules worried.

Last week, the Department of Justice announced the indictment of a regional manager of a general contractor for wire fraud involving the DBE program.  What is unique about this case – and why you should take notice – is that the defendant was not an owner, partner, or executive officer of the general contractor, but rather a regional manager.  Previous indictments of individuals almost always involved executive officers or those with an ownership interest.  In fact, I cannot recall any DBE indictments involving a B/C level manager. Accordingly to the indictment,  the general manager arranged a classic DBE pass-through scheme, which we have previously described on this blog.  Importantly, there is no indictment that the defendant received any form of kickback as a result of the scheme.  He concocted the scheme ostensibly to further his employers interests.

I doubt that the indictments involving this case will end with the regional manager.  But, this case underscores that everyone in your company must know and understand the ramifications of engaging in DBE fraud both for their personal well being an that of your firm.

Free DBE Compliance Audit

Posted in Disadvantage Business Enterprises (DBE)

This blog repeatedly chronicles the ramifications of failing to comply with the Department of Transportation’s Disadvantaged Business Enterprise regulations.  Jail time for executives, disbarment, fines, and bid challenges are real threats to those contractors that run afoul of the DOT’s DBE rules.  Because of the amount of interest in this area, I am pleased to announce that I am now offering a scaled back version of a full DBE audit program for FREE.  My mini-DBE audit covers many of the topics discussed in my popular DBE Compliance Webinar, including:

1.  The importance of documenting good-faith efforts;

2.  Recognizing the red-flags of DBE fraud;

3.  Assuring your contracts are in compliance with federal and state DBE rules.

Interested parties can contact me for more information by email at wally@zimolonglaw.com.