Improper OCI Certification Ruled a False Claim by Fourth Circuit
 
August 18, 2004
 
David Scott "Dave" Black- Northern Virginia

A recent decision from the United States Court of Appeals for the Fourth Circuit held that a false organizational conflict of interest (OCI) certification is a material statement under the False Claims Act that exposes a successful offeror to False Claims Act liability.[1] The court held that a contractor falsely certified to the Department of Energy (DOE) that no organizational conflict of interest existed between the contractor and its subcontractor relating to a proposed $2.75 million subcontract.[2] In this case, the contractor had to pay a $7,500 penalty for each of the 26 invoices it submitted for payment under the contract.

A management and operations contractor for DOE sought approval from the Agency to subcontract a training program for employees who would operate an In-Tank Precipitation (ITP) facility to store radioactive waste at the Savannah River Site. An employee of the subcontractor had assisted in preparing some of the briefing papers that were used by the prime contractor in convincing DOE to subcontract the training program and otherwise had access to procurement-sensitive documents related to the proposed subcontract award. The subcontractor employee with access to the procurement-sensitive information helped to prepare the subcontractor’s bid, which included the OCI certification. A procurement specialist for the prime contractor reviewed the subcontractor’s bid and recommended that DOE approve the subcontract award.

Approximately eight months after DOE approved the subcontract award, the agency was informed about the OCI issue. After conducting an investigation into the matter, DOE determined that the subcontractor did not have an OCI regarding its work under the subcontract. DOE approved the original purchase order for approximately $2.5 million and subsequently approved 25 additional invoices submitted by the prime contractor, for a total of more than $9 million for the training program.

Despite the agency’s conclusion concerning the OCI, a South Carolina jury, in a qui tam action brought by a former vice president of the subcontractor, concluded that the prime contractor did have an OCI and falsely certified that none existed. The Fourth Circuit agreed, holding that, even though the agency looked at the OCI issue and concluded that a conflict did not exist, the invoices submitted by the prime contractor after the agency’s determination were still false claims.

In upholding the lower court’s decision, the Fourth Circuit reasoned that the false certification impacted the agency’s decision to approve the subcontract: “It is hard for us to imagine that DOE, if it had fully known the details of the OCI, would have allowed [the subcontractor] to receive the subcontract.”[3]

Although the contractor was liable for a penalty on each of the 26 invoices submitted for the subcontract work, it was not liable for the $9 million paid by DOE for the subcontracted work because the government received the benefit of what it paid for and there was no evidence that the work could have been performed for less than paid to the subcontractor.

The Fourth Circuit’s decision has important implications for federal contractors. In this case, a finding by the agency that an OCI did not exist failed to insulate that contractor from liability under the False Claims Act. Thus, the court’s decision reinforces the importance of proper certifications included with submissions to the government.

It is worth noting that the premise upon which the court based its decision was an OCI that the jury found existed at the time of proposal submission. Unlike OCIs that are discovered during contract administration, mitigation of the OCI here was not an option. The certification at the time of proposal submission fixed the facts, and the jury was faced with only the question of whether or not the OCI existed in contravention of the certification, not whether the OCI could be mitigated. Thus, certification with respect to OCIs in connection with proposals must be dealt with accurately and carefully.

For more information, e-mail David S. Black or Peter T. McKeen at david.black@hklaw.com or peter.mckeen@hklaw.com, respectively, or call toll free, 1-888-688-8500.

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1. Harrison v. Westinghouse, 352 F.3d 908 (4th Cir. 2003).

2. The prime contract included a provision requiring the prime contractor to provide the contracting officer with an OCI Disclosure Statement from all subcontractors to be utilized under the contract and prohibited any subcontract work until the contracting officer cleared the subcontractor for any OCI.

3. Harrison v. Westinghouse, 352 F.3d at 917.