March 2015

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.

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).