Court Denies Motion to Dismiss in Small Business Subcontracting Plan Case

In U.S. ex rel. Tran v. Computer Sciences Corp., 2014 U.S. Dist. LEXIS 90757 (D.D.C. June 3, 2014), the District Court for the District of Columbia denied a motion to dismiss in a case alleging violations of the False Claims Act (FCA) arising out of fraudulent practices involving subcontracting to small businesses in a federal government contract.

The relator alleged that Computer Sciences Corporation (“CSC”) engaged in a “pass-through” scheme whereby CSC would subcontract work to qualified small businesses and, as a condition of the subcontract and for a small fee, those small businesses would further subcontract the work to a large business of CSC’s choosing.

Under the Small Business Act, prime contractors are required to give small businesses the “maximum practicable opportunity” to participate in the performance of Government contracts.  Prime contractors who bid on contracts with the Government are required, if the contract meets certain dollar thresholds, to submit a Small Business Subcontracting Plan in order to be eligible for the award.  A Subcontracting Plan states numerical goals for subcontracting to small businesses and describes how the prime contractor intends to give small businesses maximum practicable opportunities to participate.  The Subcontracting Plan awarded by the successful bidder is incorporated into and becomes a material part of the contract with the Government.  A prime contractor has a material contractual obligation to comply in good faith with its Subcontracting Plan.

Specifically, the relator in Tran alleged that CSC’s pass-through scheme violated the FCA because it allowed CSC to report to the Government that it had met its small business subcontracting goals when, in actuality, large businesses were performing the substantive work and receiving the vast majority of the subcontracting dollars.  In part, the relator claimed that CSC induced the Government to award a contract to CSC because CSC falsely represented that it intended to comply in good faith with its Subcontracting Plan.

CSC’s primary argument in its motion to dismiss was that the relator’s claims should be dismissed because the pass-through scheme was legal.  However, as the Court notes in its opinion, there is nothing in the relevant regulations to suggest that such a scheme is legal and the notion that such a scheme is permissible “flies in the face of the Small Business Act and its purpose.”  Accordingly, the court concluded “that nothing in CSC’s motion to dismiss establishes that the challenged pass-through scheme is unquestionably proper such that Relator’s claim . . . must necessarily be dismissed.” (emphasis added).

Although there have been previous court opinions over the years to look at FCA violations in the context of Subcontracting Plan misconduct, the Tran opinion is perhaps the most detailed and well-reasoned.  The pass-through schemes alleged in Tran and similar schemes are not altogether uncommon among prime contractors who deal with the Government.  These schemes completely undermine the purposes of the Small Business Act and cannot be said to equate to good faith compliance.  Hopefully, opinions such as the Tran opinion will have the effect of curbing this type of fraud by government contractors.

 

If you have a Small Business Fraud case, contact the Rabon Law Firm for a free consultation.

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