Legal Blog

CAUTION – CHECK ANY AND ALL SMALL BUSINESS SIZE REPRESENTATIONS, OR YOU MAY PAY THE PRICE

It took a while; almost three years. But, the U.S. Small Business Administration issued at the end of June 2013, its final rules implementing the Small Business Jobs Act of 2010’s provisions pertaining to small business size and status integrity. Under these new rules, SBA has flexed its muscles to assure that companies caught cheating the system, or attempting to cheat the system, by miscertifying their size status are punished, unless they can prove a good faith error. You can read the rules here: https://www.federalregister.gov/articles/2013/06/28/2013-15418/small-business-size-and-status-integrity Under the new rules, a company which willfully seeks and receives a contract award by misrepresentation of its size is presumed to have caused the United States a loss equal to the value of the contract. That means that a firm that wins a $10 million contract and is caught in a miscertification can be liable to the United States for $10 million. This rule dramatically changes the legal situation which existed previously. Prior to issuance of the rule, the Government would likely have needed to show actual damages, which would be difficult if the miscertifying contractor performed and delivered the products or services the Government ordered. Under the previously existing regime, the Government could sue for damages for a miscertification, but would not likely recover much, if anything. Now, the incentive for the Government to bring actions, or for private qui tam actions, is much higher. Furthermore, the new regulations indicate that some penalties for size misrepresentations apply even if a contract award does not result from the miscertification. This would include suspension or disbarment, civil penalties, or criminal prosecution. The presumption of a willful misrepresentation is rebuttable, but the burden is on the certifier. To avoid liability, the certifying company would need to show that the misrepresentation was the result of ‘unintentional errors, technical malfunctions, or other similar situations. A good faith misinterpretation of an ambiguous SBA rule would not be considered a willful misrepresentation under this standard, but a judge, jury or other decider of fact would need to be convinced. Relevant factors to consider in determining good faith would include the firm’s internal management procedures governing size representation or certification, the clarity or ambiguity of the representation or certification requirement, and the efforts made to correct an incorrect or invalid representation or certification in a timely manner. A miscertification could involve an offer or application for an award intended for small business concerns. It also would include a misstatement on a Federal database, such as the System for Award Management (SAM), which is the successor to the better known Online Representations and Certifications Application (ORCA) database. Moreover, the new rules apply to miscertifications from subcontractors. A prime contractor acting in good faith would not be held liable for misrepresentations made by its subcontractors regarding the subcontractors’ size, but the prime contractor would need to show its good faith. Firms that fail to update their size status in the SAM database, or a future successor database at least annually will no longer be identified as small until the representation is updated. So, at least annually, every small firm will need to validate its status accurately to remain eligible for new contract awards based on its status. The potential exposure of any business – large or small – bidding with another business which certifies itself as small, will likely generate disputes between subs and primes. It also will create a need for added due diligence and indemnification requirements in many contracting situations. For example, before joint venturing, there is now an enhanced need to validate a partners’ size to avoid a charge of joint liability. Also, the need to assure that the joint venture itself would not destroy the size status of the bidder becomes even more important. Moreover, the need to validate an acquisition target’s size for an extended period prior to the acquisition becomes even more important as the acquiring company would not want to be acquiring multi-millions of dollars of potential liability. The new SBA rules don’t change the basic needs for accurate certifications. They do increase the dangers of miscertifications, however. So, the lesson for all is: be more aware and careful now or you could be exposed to a potentially crippling liability in the future. If you have any questions regarding the Small Business Job Act of 2010’s provisions pertaining to small business size and status integrity, please contact Offit Kurman government contracting attorney Edward Tolchin at 240-507-1769 or etolchin@offitkurman.com. About the author Government contracts attorney Edward Tolchin’s practice is focused on government contracting, Business litigation, and technology matters. In government contracting issues, Mr. Tolchin represents prime and subcontractors in contract negotiation and formation matters and in disputes involving both government and commercial business issues. He has been involved in procurement cases before many of the federal and state boards of contract appeal, Government Accountability Office, Small Business Administration, United States Court of Federal Claims, Court of Appeals for the Federal Circuit and other federal and state courts across the United States. His Business litigation practice involves large and small matters in federal and state courts and before numerous arbitration panels. In the technology arena, Mr. Tolchin has assisted in disputes, licensing, and business development matters for clients ranging from startups to Fortune 500 companies.