New Penalties for Misrepresentations From Small Business Government Contractors

Under a final rule effective August 27, 2013, small businesses, including those in the automotive industry, that willfully misrepresent their small business size status for the purpose of soliciting or obtaining a federal government contract or other federal funding, will face additional harsh penalties. Given these new penalties for small business size status misrepresentations, all small business concerns conducting business with the federal government should consult with legal counsel to obtain a legal opinion confirming the concern’s small business size status. In the event the government challenges the concern’s size status, having such a legal opinion on file will assist the concern in disputing any allegation that the misrepresentation was willful.

Under the Small Business Jobs Act of 2010 (the “Jobs Act”), there is a presumption of loss equal to the value of the contract or other instrument when a concern willfully seeks and receives an award by misrepresentation. Pub. L. No. 111-240. This provision applies to prime contracts, subcontracts, cooperative agreements, cooperative research and development agreements, and grants (collectively, “Federal Procurements”). In the final rule issued on June 28, 2013 implementing a part of the Jobs Act, the Small Business Administration (“SBA”) noted that the presumption of loss will be applied in all criminal, civil, administrative, contractual, common law, or other actions in which the government seeks to redress willful misrepresentation. 78 F.R. 38811 (6/28/13). Based on comments received in response to the interim rule, in the final rule the SBA determined that this presumption of loss is rebuttable and a concern will not be liable for unintentional errors, technical malfunctions, or other similar situations. 13 C.F.R. § 121.108(d).

The rule specifies that “relevant factors to consider in making this determination may 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.” 13 C.F.R. § 121.108(d). The final rule provides that the following actions will be considered “affirmative, willful and intentional certifications of small business size and status”:

• Submission of a bid, proposal, application, or offer for a Federal Procurement, set aside or otherwise classified as intended for award to small business concerns.
• Submission of a bid, proposal, application, or offer for a Federal Procurement, 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 Procurement as a small business concern (e.g., registration in the System for Award Management (“SAM”) at www.sam.gov). 13 C.F.R. § 121.108(b).

Further, the final rule requires contractors to update their size status in the SAM database at least annually, or the concern will no longer be identified in SAM as a small business concern until its representation is updated.

A prime contractor acting in good faith may rely on the written representations of its subcontractor regarding the subcontractor’s small business size or status. 13 C.F.R. § 121.108(d). Prime contractors, however, will only be insulated from liability from misrepresentations made by their subcontractors if the prime contractor acted “in good faith.” To that end, all prime contractors should require their vendors and suppliers to annually submit written certifications regarding their small business size status and update such certifications if and when their size status changes. The final rule lists the following penalties for a concern’s willful misrepresentation of its small business size status:

• Suspension or debarment.
• Severe criminal penalties for knowingly misrepresenting the small business size status of a concern in connection with a Federal Procurement or knowingly making false statements or misrepresentations to the SBA for the purpose of influencing any actions of the SBA.
• Severe civil penalties, including, but not limited to, those under the civil False Claims Act, 31 U.S.C. 3729-3733 and the Program Fraud Civil Remedies Act, 331 U.S.C. 3801-3812.
• Repayment to the government of the total value of the Federal Procurement award.

This final rule issued by the SBA on June 28, 2013 can be found at 78 Federal Register 38811 (6/28/13) (www.gpo.gov/fdsys/pkg/FR-2013-06-28/pdf/2013-15418.pdf).