Last week, I posted about how whistleblowers continue to receive large settlements related to DBE fraud. A somewhat recent case from the federal court in Maryland shows how whistleblowers are ferreting out DBE fraud on construction projects receiving any form of federal funding.

The Case

The case involves a bridge painting project in Maryland that was let by the Maryland State Highway Administration. The contract required the prime contractor to meet a 15% DBE participation goal.  The prime contractor submitted a bid stating it would have 15.12% DBE participation.  After it was awarded the contract, the prime contractor – as is typical – submitted additional forms certifying to the MSHA that 15.12% of its contract price would be performed by a DBE firm.  The prime contractor indicated that one DBE subcontractor, Northeast Work and Safety Boats, LLC (“NWSB”), would perform the 15.12% of the work.

Continue Reading District Court Allows DBE False Claims Act Case to Proceed

It has been awhile since I last blogged about fraud involving the Department of Transportation’s disadvantaged business enterprise (DBE) program.  Trust me, the problem has not gone away. If anything, prosecutions and civil claims filed under the False Claims Act alleging DBE fraud have become so frequent, I could not write a blog post about each one.  The biggest winners in 2016 may have been the whistleblowers that brought the DBE fraud to the attention of the Department of Justice, who were awarded millions of dollars for doing their part to ferret out fraud.  Recent whistleblower settlements include:

Continue Reading Whistleblowers Continue to Receive Large Settlements in DBE Fraud Cases

In early March, the United States Federal Court for the Southern District of Ohio unsealed a complaint filed by the Painters and Allied Trade’s Council No. 6 against a painting contractor under the False Claims Act.  (A copy of the complaint can be viewed here: Complaint)  The Complaint is brought against a non-union painting subcontractor performing painting work on a project subject to the Davis-Bacon Act (prevailing wage).  According to the Complaint, the Painters Union “organizing” effort (meaning picketing, hand-billing, and bannering) at the project, where it learned that the painting subcontractor was allegedly not paying Davis-Bacon wage rates to its employees but was submitting certified payroll to the general contractor that it was (a big no-no).

As we have talked about before, the False Claims Act applies to claims submitted by contractors and subcontractors on a project receiving federal funding.  The False Claims Act permits the party bringing the claim to recover up to 30% of what is recovered for the government.   As we have said, it makes bounty hunters out of former or disgruntled employees with knowledge of a contractor’s transgression. Moreover, the False Claims Act does not require actual knowledge.  A contractor can violate the Act through deliberate ignorance (see no evil, hear no evil, speak no evil) or reckless disregard (I do not know if it is false, but its non of my business).

Damages under the False Claims Act are also significant and the party bringing the action on behalf of the government is entitled to up to three times the actual loss, plus per claim penalty and attorneys fees.  As we have said, with a False Claims Act action, even when you win you lose because of the expense in defending such a claim.

The defendant in the Painters Union case has not yet filed an answer so it is unclear what its defense will be.  However, as we have seen, unions are increasingly aggressive in increasing their shrinking market share.  We will have to see if this case is a one-off isolated incident or signals a more organized effort on the part of Big Labor.

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.