In latest edition of The Wright Toolbox:
SBA Size Certification Matters For False Claims Act Purposes
In the case of United States ex rel. Bid Solve, Inc. v. CWS Mktg. Grp., Inc., No. 1:19-CV-1861-TNM, 2023 WL 3521616, at *1–8 (D.D.C. May 18, 2023), the federal court held that a false certification as to a bidder’s size for an SBA small business set aside contract was a sufficient basis for False Claims Act, 31 U.S.C. § 3729 case (“FCA”). In 2017, the IRS solicited bids for a contract to help it sell seized property. Two companies, Bid Solve and CWS Marketing Group, bid on the contract, which was reserved for small businesses. Bid Solve lost the award and claimed that CWS understated its size and was not actually a small business. Bid Solve protested the award to the SBA and lost. It then filed suit in federal court under the FCA.
To be considered a small business for purposes of the contract, companies must have averaged under $7.5 million in annual “receipts” over the past three years. CWS submitted its bid certifying that it was a small business and that it had average annual receipts of $5.5 million. Bid Solve contended that CWS misreported its receipts by improperly subtracting certain expenses. When correctly calculated, CWS had average receipts over $7.5 million and thus was not small and was not eligible to bid on the contract. For purposes of the FCA claim – Bid Solve claimed that CWS lied about its receipts when claiming that it was a small business and those lies induced the agency to award CWS the contract. The court held that there was no genuine dispute that some of CWS’ statements were false.
13 C.F.R. § 121.104(a) (2016), the regulation that governs how companies must calculate “receipts” defines receipts as “all revenue in whatever form … reduced by returns and allowances.” CWS improperly subtracted “flowthrough income” from its revenue when certifying that it was a small business. CWS defined “flowthrough income” as “reimbursements for expenses incurred on behalf of and for the benefit of customers.” The court stated that the only exclusions from receipts are those specifically listed in the C.F.R. and if an item is not listed in the provision, a company may not subtract it from “all revenue … reduced by returns and allowances.” Here, CWS excluded one of those prohibited items by removing “flowthrough income.” Using the proper calculation, by CWS’s own books, its average gross receipts were either $8.8 or $9.3 million, depending on whether that was calculated on an accrual or cash basis. So CWS’s receipts exceeded $7.5 million, and because of that, CWS was not a small business. The court granted summary judgment in favor of Bid Solve on the issue of a sufficient false statement for purposes of FCA.
This case is a reminder to government contractors competing for small business set-aside contracts that strict compliance with SBA regulations is important and that overly aggressive interpretations of these regulations invite the risk of significant exposure. In addition, under the “Presumed Loss” Rule applicable to small business contracts, the government’s damages (which may be trebled) for a fraudulently-obtained set-aside contract equal the total value of the contract. Finally, FCA violations are one of the enumerated causes for debarment of a contractor. See 48 C.F.R. § 9.406-2 (b)(1)(vi)(B).
If you have any questions regarding this matter, please contact any member of the WCS Government Contracts Practice Group.