On August 23, 2014, the "Presumed Loss Rule" went into effect. This rule was issued as part of the SBA's June 2013 Final Rule implementing provisions of the Small Business Jobs Act of 2010. Essentially, the rule creates a rebuttable presumption with respect to a firm's willful misrepresentation of size or status in order to receive a contract (subcontract, grant or cooperative agreement) that has been set-aside for small businesses. In such a case, the loss to the government is "presumed" to be the total amount expended by the government on the contract.
This rule applies to misrepresentations in size or in status in the context of pursuing and/or obtaining a federal contract, subcontract or grant that was specifically set aside for small businesses. Size refers to whether the company is a large or a small business (as those terms are used for federal contracting purposes). For more information on determining whether a business is small, please see our prior blog post "How Do I Know If My Business Is Small And Able to Participate in Federal Small Business Programs." Status can refer to socio-economic status such as certification in the 8(a) business development, WOSB, HUBZone or SDVOSB programs.
Prior to the Presumed Loss Rule, in cases involving size/status misrepresentation, the Federal government had to prove that it was damaged as a result of the misrepresentation. In such cases, it was difficult for the government to prove it actually suffered economic harm. For example, in the case of a contract for construction of a government building where the building was constructed satisfactorily and with no issues, the argument was that the government didn't actually suffer any economic harm based on the contractor's misrepresentation of its size at the proposal stage.
Things to note about the Presumed Loss Rule:
*It applies to contracts that have been set aside for small businesses.
*It applies when it has been established that the firm willfully sought and received the contract by misrepresentation. The regulation specifies that the following actions will be deemed to be willful and intentional certifications:
- Submission of a bid, proposal, application or offer for a Federal contract, grant, subcontract, cooperative agreement, or cooperative research and development agreement reserved, set aside, or otherwise classified as intended for award to small business concerns.
- Submission of a bid, proposal, application or offer for a Federal contract, grant, subcontract, cooperative agreement, or cooperative research and development agreement which in any way encourages a Federal agency to classify the bid or proposal, if awarded, as an award to a small business concern.
- Registration on any Federal electronic database for the purpose of being considered for award of a Federal grant, contract, subcontract, cooperative agreement, or cooperative research and development agreement, as a small business concern.
*The rule may be determined not to apply in the case of unintentional errors, technical malfunctions, and other similar situations that demonstrate that a misrepresentation of size was not affirmative, intentional, willful or actionable under the False Claims Act etc.
*The rule also states that a prime contractor acting in good faith should not be held liable for any misrepresentation(s) made by its subcontractors regarding the subcontractors' size. In this situation, various factors will be evaluated in determining the prime contractor's liability, including the prime contractor's internal management procedures regarding size and the effort, if any, to correct an incorrect or invalid representation.
*Penalties for misrepresentation include: (1) suspension or debarment; (2) criminal penalties; and (3) civil penalties. As previously mentioned, when the Presumed Loss Applies, there will be a rebuttable presumption that the loss to the government based on the total amount expended on the contract, subcontract or grant.
United States v. Singh Case
On June 17, 2016, the U.S. District Court for the District of Columbia issued a Memorandum Opinion in the case of United States v. Sing, Criminal Action No. 15-173 (RBW) (D.D.C. Jun 17, 2016). This case is the first published decision enforcing the Presumed Loss Rule since it was issued in 2014.
In this case, the Defendant used his status as a disadvantaged individual to obtain 8(a) certification for his company (Company A). After his company completed its 9-year term in the 8(a) program, the Defendant formed a second company (Company B) that applied for and received 8(a) certification. Company B went on to win 26 contracts totaling over $8 Million based on its 8(a) status. With respect to operations and performance on its government contracts, Company B almost exclusively used the resources of Company A. Specifically, Defendant used a combination of Company A personnel and subcontractors to staff projects awarded to Company B on which Company A was working. Ultimately, the charge was that Defendant executed a scheme to defraud the SBA and the GSA based on this unlawful arrangement.
The parties in this case disagreed as to the value of the loss sustained by the government resulting from Defendant's conduct. The Court found that the United States Sentencing Guidelines, which takes into account the services rendered by the Defendant, did not apply; rather, the Court found that the Presumed Loss Rule Applied. Defendant then argued that the presumption could be rebutted with evidence showing that Defendant "provided valuable services" to the government and Defendant himself only profited in the amount of $23,768.00. The Court rejected Defendant's argument, including the fact that the government received the exact services it procured under the contracts, and instead found the loss to the government resulting from the fraudulently procured contracts to be the full value of the contracts, which was $8,533.562.86 (and in accordance with the Presumed Loss Rule).
Conclusion and Lessons Learned
Many businesses don't have a clear understanding of why it's so important to know whether your business is small; however, this rule and the case discussed above should provide some indication of the importance of accurate representation when it comes to size and/or socio-economic status - for proposal purposes as well as registration in government databases. This case also provides an indication that it may be difficult for companies to rebut the presumption once it is applied.
Prime contractors would be wise to institute procedures to ensure that: (1) they are always monitoring their size and are in good standing with the SBA for the various programs they participate in; and (2) their subcontractors are also in compliance with size and socio-economic representation(s).
For questions regarding the Presumed Loss Rule, small business or socio-economic status, please contact us at: firstname.lastname@example.org.