Supplemental Conditions

The Hidden Dangers of Failing to Follow DBE Rules (Part 2): The False Claims Act

Posted in Disadvantage Business Enterprises (DBE), False Claims Act
Mega-law firm Wilmer Hale recently published a its 2013 False Claims Act Year in Review.  The report is an insightful read for any business dealing with the federal government.  However, two statistics in particular should stand out for the construction industry:
  • False Claims Act suits hitting an all-time high of 753 in 2013, and
  • Government enforcement concerning disadvantaged business status is a particular focus of the Department of Justice.
Background on the False Claims Act
The False Claims Act authorizes private individuals to bring a civil claim in the name of the United States against anyone who fraudulent obtained money or property from the government. The person who brings the action is entitled to 30% of the amount recovered for the government.   (For the history buffs out there, the roots of the Act date back to the Civil War and was passed in an effort to ferret out profiteering and overcharging by contractors supplying war goods to the Union. Indeed, for years the Act was known as the Lincoln Laws.)
The elements of a False Claims Act claim are:
(1) a claim or statement to get the government to pay money;
(2) that is false or fraudulent; and
(3) that defendant knew was false or fraudulent.
Importantly, actual knowledge or specific intent to defraud the government is not necessary to be liable under the False Claims Act, reckless disregard for or deliberate ignorance of the truth are sufficient.
DBE Regulations and the False Claims Act.

A contractor that fails to follow DBE rules in turn almost always violates the False Claims Act.  The violation occurs when a contractor submits a payment application that certifies that a certain percentage of work was performed by a DBE when in reality the DBE performed no commercially useful function.  Importantly, to violate the False Claims Act the contractor need not be a knowing participant in the DBE fraud so long as it is shown that the contractor recklessly or deliberately disregarded the existence (I don’t know about it and I don’t what to know about it) of the DBE fraud.

 

Winning is Still Losing.

 

The False Claims Act makes bounty hunters out of disgruntled employees.  Couple this with an increased interest on part of the trial lawyers bar makes the risk of facing a False Claims Act claim significant.  Because the Act is complex and the risks of losing so severe, defending a False Claims Act action is not cheap.  Even if a contractor successfully defends the action and it is ultimately dismissed, the attorneys fees will undoubtedly impact a firm’s bottom line.

The biggest takeaway for contractors working under a federal, state, or local DBE program is that they simply cannot ignore or fail to investigate potential wrongdoing involving the DBE program.