Dec 2011 , Vol. VI, No.1

Raising the Stakes: The Increased Cost of Misrepresenting Small Business Status

Authored by Ashley Moss

Small businesses receive preferential treatment with respect to the award of government contracts.  Misrepresenting small business status, however, can lead to serious repercussions.  The False Claims Act penalizes individuals who make false or fraudulent statements with civil penalties as well as a penalty of three-times the damages the United States Government sustained because of the individual’s acts.  Until 2010, the Government’s “damages” often proved difficult to quantify; therefore, the costs of enforcing the law often outweighed its benefits.  The Small Business Jobs Act of 2010, however, made quantifying damages much simpler, thereby increasing enforcement of the False Claims Act.     
 

The Small Business Jobs Act of 2010 creates a “presumption of loss.”  Essentially, the United States is presumed to lose “the total amount expended on the contract” when a contractor receives a small business contract by misrepresentation.  Thus, if caught, a contractor who misrepresents its small business status is liable for three times the total contract amount.  This increases the cost of misrepresentations quite a bit. 
 

Moreover, the presumption of loss incentivizes “whistleblower” claims.  A private person (the “whistleblower”) may sue to enforce the False Claims Act in the name of the Government.  If his or her lawsuit is ultimately successful, the person may receive up to 30 percent of the proceeds.  Now that these proceeds include the total contract amount, acting as a whistleblower is more lucrative than ever before.
 

The Act also provides internal filters to reduce inadvertent misrepresentations.  Now, contractors who claim small business status must annually certify their business size and status.  Additionally, they must certify their small business status in every solicitation and bid for a small business contract.  This certification must include the exact size of the business and an authorized official’s signature. 
 

Accordingly, the Small Business Jobs Act of 2010 has changed the landscape of enforcement of the False Claims Act.  With the new legislation, the False Claims Act will likely be enforced far more frequently, and misrepresentations of small business status are more costly than ever.
 

Authored by attorney Ashley Moss, these articles are meant to bring awareness to these topics and are not intended to be used as legal advice.
For more information, contact Mike at 757-446-8626 or Bill Franczek at 757-446-8600.
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