March 23, 2021

Coffee & Conversation - Leveling the Playing Field: FCA Enforcement of Government Diverse Vendor Commitments

This installment of Coffee & Conversations features attorney Brittney Edwards and Gregory McLaughlin, lead senior counsel at IBM, for a discussion on False Claims Act (FCA) litigation and government contracting with Disadvantaged Business Enterprises (DBEs). They cover legal theories and trends in FCA cases before moving to compliance considerations when working with DBEs. Topics include pre- and post-contract compliance, due diligence and oversight of DBEs, and risk assessment and mitigation strategies. Mr. McLaughlin also shares his experience and insights from his work as in-house counsel in this area.

Podcast Transcript

Brittney Edwards: Welcome to another installment of Coffee & Conversation. I am Brittney Edwards, and my friend and mentor Greg McLaughlin is joining me today for this discussion. Greg is lead senior counsel at IBM, and he essentially serves as a functional and operational general counsel. He provides end-to-end legal services to IBM's U.S., state and local market, and I'm happy to be here with him today to talk about some False Claims Act liability and different types of certifications. Well, specifically, DBEs.

Gregory McLaughlin: Delighted to be here. Thanks very much for inviting me.

An Introduction to the False Claims Act: Fraudulent Inducement, Implied Certification and Recent Case Law

Brittney Edwards: Yup. So today we're going to talk about False Claims Act liability in the public procurement space. And specifically, we'll be talking about certifying requirements relating to disadvantaged business entities or DBEs. And I think although it's going to be specifically geared towards that, it'll probably be generally applicable to other types of certifications in that space as well. So the False Claims Act, I guess we'll just start with a little bit of a background there. As most of you probably know, it's an anti-fraud statute, and it prohibits parties from knowingly presenting or causing to be presented a false claim to the government for payment. And it also prevents a party from knowingly making or using, or causing to be used or made, a false record or statement to get a false claim paid. With respect to the knowledge requirement, it's very broad. It could be actual knowledge, deliberate indifference or reckless disregard. And then in terms of what makes a statement false or fraudulent, there's various types, but as I mentioned earlier, we'll be focusing on false certifications with respect to statutes, regulations, contractual obligations, and when you make such a statement complying certification when you knowingly do not comply. And typically this will happen, I guess, either, and Greg can correct me, either, negotiation stage when you're getting an RFP and submitting bids or afterwards when typically an invoice or something that you're actually submitting for payment.

Gregory McLaughlin: That is right. I would agree with that there are essentially two buckets. One of the buckets has two halves of False Claims Act cases, at least the way I think of it. There's pre-contract and then post-contract. Pre-contract, usually that the term used for that is "fraudulent inducement," and the idea is that by making false statements in the bid or negotiation phase of the contract that you have induced the government into awarding the contract to you fraudulently and that that is a form of a false claim. And then of course, after the contract is made, you can submit false claims in the form of invoices that are actually incorrect in terms of dollar amount or content, or your conduct can be false. It can be in violation of the law, and then you are falsely or fraudulently certifying that you're otherwise in compliance with the law. So both fraudulent inducement and then post-contracts, those would be either just straight falsification or what's called "implied certification." You are impliedly certifying you're in compliance when in fact you're not. And then, of course, scienter and materiality have to apply.

Brittney Edwards: Yeah, and then so, I think, well, for the implied certification theory that was just recently — well, I guess, somewhat recently in 2016 — they're validated as an actual theory of recovery under the FCA by the Supreme Court. And in Escobar, the Supreme Court clarified that it's not only that there, the claim is not only a request for payment, but you have to actually make some sort of specific representation about the goods or services that are being provided. And then the Supreme Court also clarified the materiality requirement, which is pretty strict, and that you have to have actual knowledge that the noncompliance was material to the government's payment decision.

Gregory McLaughlin: Yeah, absolutely, Escobar was very, is a critical piece in clarifying and sharpening the definition around false certification, implied certification cases. Before that, the defense bar would argue that the implied certification cases were becoming effectively criminalizing something other than action. Of course, the whole idea is that to decriminalize mal intent, it has to be conduct. And so in Escobar, the Supreme Court clarified that there has to be an actual, that while the certification is implied, there must be something that you are certifying to when you make the submission of a claim. And then, as you said, you have to be able to demonstrate that the thing you were certifying to was material to the government. Now cases since then, you could argue, have watered those down a little bit. But that materiality requirement is really very important to be able to show that the government thought this was important.

Brittney Edwards: Yeah, and I think it also probably depends what jurisdiction you're in as well, because there seems to be several splits in this area. And then I was also looking at some articles, too, how Escobar has impacted the fraudulent inducement theory and whether materiality is even a requirement for that theory or whether, if you induce the government to enter into the contract, then that's it, and any claim whatsoever that's submitted under that contract, even if it's proper, would give liability to a False Claims claim. But then other circuits have gone different ways. I think the Second Circuit recently came out and used a theory where you are looking pre-contract and post-contract as to the government's decision and how they're making that. I think a different D.C. Circuit said you look pre only and not whatever decisions were made after the fact. So it looks like courts are still grappling through what that's going to look like and coming down on different sides of it.

Gregory McLaughlin: What's interesting to me is we could have a whole separate conversation about fraudulent inducement as an end run on the traditional theory that contract remedies, contracts are limited to contract remedies. But set that aside, what's interesting to me is how the law seems to be developing in similar ways in both the commercial space and the government space on fraudulent inducement. Certainly, there's a big push by the plaintiffs' bar on that theory, kind of across the board, and from the perspective of someone who is in-house, the fraudulent inducement theory of action is particularly troubling because it could, in theory, criminalize anything that turns out to be untrue. Right? Just about anything that you say in a bid could eventually turn out to be untrue, but you don't know that at the time. So how are we going to measure knew or should have known? How are we going to measure whether or not I should have anticipated that a particular sub was going to fall down on the job. Or, in the context of our conversation today, when it comes to disadvantaged business entities, how was I supposed to certify in advance that a DBE might end up going out of business and then I wouldn't me my DBE commitments? Maybe it makes sense to take a quick step back at this point to talk about DBEs and the procurement process generally. What you think?

Brittney Edwards: Yeah, I think that's a good stepping stone.

DBEs in Public Procurement

Gregory McLaughlin: So at least as far as my practice goes, public procurement payment from, of government dollars or projects or sourcing of goods or services could be funded by state and local taxpayer dollars. And very often there's at least some piece of that at the state and local level. But increasingly, federal dollars are being spent by state and local governments, whether that be in the form of a direct federal spend or a grant. Either way, the federal rules, federal laws, federal False Claims Act get pulled in, as well as a number of other regulations that may be specific to the grant. Most of those federal grants will have some kind of a DBE target, whether that be for the agency overall, probably set at the state or the local level and doesn't have to be met in any one contract, it just has to be met on an overall basis. Could be a set-aside, the contract itself could be a set-aside for DBEs. Or it could be an aspirational target in the contract that the vendor is either required to meet — that's usually, that's less likely — or, as I said, aspirational for them to try to meet over the life of the contract. But either way, the RFP, the request for proposal, at the outset of the contract that the vendor is bidding on will set out all of these rules. It'll specify that federal dollars are or are not being used, what regulations might apply, what regulations the vendor has to comply with and then, germane to our conversation, what the DBE targets are. This is the point where, if you're certifying to it as the vendor, you might get into fraudulent inducement trouble, but then also, of course, if you sign up to it down the line, you have to actually use DBEs and meet those percentages. And of course, the DBEs can't be a mere pass-through under just about all of these laws, they have to provide a commercially useful function.

Brittney Edwards: Can you give us some explanations about what a "commercially useful function" is and maybe how courts will look at that and make that determination and decide, OK, vendor, you're doing, you're using this DBE in an appropriate way. You can claim the credit, the DBE can submit for credit as well.

Gregory McLaughlin: Absolutely. So, the standard is commercially useful functions, and the regulations very often lay out some examples of what a commercially useful function is. Like any regulation, it's helpful, but only to a point. They provide some examples of things that could be commercially useful functions, and then they have just a general catch-all that says they can't be a pass-through. The one, the examples that they give, and the examples the court seizes on, tend to be things like they have to have, they have to provide the actual materials, negotiate for the actual materials, source the materials, source the folks doing the actual work, negotiate their rates, supervise and have supervisory authority, and that they, and that the company be independent. And that's a big one. There are prosecutors that have pursued false certification theories on the basis that the DBE wasn't sufficiently independent, so this can lead you to a pretty gray area. The clearest one side of the spectrum would be where the DBE was literally set up days or weeks before the RFP. Someone who wasn't otherwise connected to a DBE was chosen to lead the DBE and then get themselves qualified as a DBE, but in fact, the entity is really owned, it's like an LLC of a non-DBE entity, or that the non-DBE entity took most of the profits or had a controlling stake in the DBE. So the ownership and control is a fairly easy test to meet. Some of the others are pretty easy to fall, to trip over. So if you're in the middle of performing a contract and you're the prime, a non-DBE prime, and you see the DVD struggling, you're, particularly because you're on the hook for, contractually on the hook for their delivery, you might be tempted to step in and try to help, do well by doing good. In fact, there are a number of AGs and enforced regulatory enforcement agencies that have decided that that kind of help — stepping in and helping them source materials, stepping in and help them, helping them supervise, stepping in and helping them run the invoicing — is really actually evidence of a broader conspiracy and an attempt to evade the DBE rules. So it's a spectrum. There's probably some conduct that you can assume is pretty clearly violative of the FCA. The minute that you're actually falsifying corporate structure or ownership or invoicing, you're already in trouble. On the other side of the spectrum are the things where you're just trying to get the contract delivered for the benefit of the taxpayers, and you, as the non-DBE prime, are stepping in to try to do the right thing and make sure that the contract happens. But that could very much be a danger area.

Brittney Edwards: So how do you handle that if that situation comes up? Would you, I guess, in two ways, how do you oversee it internally and make sure as you're going along that you're in compliance with this? And then if an issue like that presents itself, is this something you would go back to the agency with and try to renegotiate? How do you work through that issue if it arises?

Gregory McLaughlin: Well, you've got to start before, you should be thinking about these things before you even bid, right? So you absolutely need to be doing your diligence on DBEs before you actually submit your bid. You've got to be comfortable that the DBE you're dealing with is upfront and shooting straight and that they, and that they, if you've verified their bona fides, that they are a DBE, that they qualified, that they meet the definition and, not for nothing, but that they are prepared to perform, that they have adequate resources to deliver that portion of the contract that you are designating them for. Now, I'll add a footnote here: There are times when during the negotiation, or the scope discussion phase with the customer, the customer has a particular comfort level with a DBE and indicates they want you to use a particular DBE. In that instance, the, you might be tempted to think that the agency's selection of that DBE would be a solid defense. But that's not how it works. You still have your same diligence requirements. You still have to make sure that the DBE meets all of its requirements and can deliver. You will still be on the hook if they don't deliver, at least from a contractual perspective, and if you take the work away from them and now you don't meet your targets, you will be on the hook for that as well. Once you get into the delivery phase, so it's a combination of diligence and discipline. So once you get into the delivery phase, you need to continue being diligent to make sure that this DBE is not further subcontracting the work to a non-DBE, that they're showing up and they're supervising their employees. And then you have to have the discipline to, if that starts to happen, you start to get an indication that your subcontractor, you DBE subcontractor, isn't shooting straight with you or is starting to fall down on the job, you need to immediately engage the government agency. You also need to be really careful, of course, along the way here that your certifications are as scrupulously honest and correct as you can make them. Try to make them on the basis of current knowledge, try to make them on the basis of to the best of my information and belief and try to make them point in time certifications that you have done the work to verify. Don't ever take anything for granted when you're certifying or affirming something to the government. This is not just under penalty of perjury, it's under penalty of the FCA, and you could go to jail for those things. So I would say it's a combination of diligence and then discipline.

RFP Terms, Contract Language and Vendor Conversations

Brittney Edwards: OK. And when you, you mentioned about suggesting that you may have some leeway in terms of how you frame these certifications. Is this often where there's a particular language in a contract and you just have to live with that, or do you typically write in the certification and you can kind of tweak the language to how you want it so you feel more comfortable to the extent that you can cover yourself?

Gregory McLaughlin: It depends. Some of them will issue the RFP saying there's categorically no negotiation, no deviation, no modification of the terms in the RFP, both in terms of terms and conditions as well as in terms of certifications and affirmations, DBE goals, form of invoice, all the way down to the form of the invoice. Others are a little bit more, I would say, either pragmatic or, you could say, consistent with the direction that the industry norms are going. In that case, you can have a reasoned conversation with a procurement officer about why X or Y is not necessarily in the best interest of the procuring agency or the taxpayers of the state or city. And then when you get into the actual delivery, again, it may depend on, through governance, through the governance process, you may have the ability to engage with your customer or engage with the procurement arm of your agency to express your concerns with how a particular certification or form is detrimental to the project as a whole because you're having trouble with certification or you're having trouble with a particular subject. So it really just depends. And it's one of those situations where as a vendor, you have to go in with your eyes wide open, conduct ahead of time. Where the agency says no discussion, no negotiation, probably means that on the other side, you're not going to get a whole lot of leeway and runway. You've just got to go in with your eyes open.

Brittney Edwards: So how do you handle a situation where, say, you feel comfortable going to the agency or the procurement arm and kind of raising these issues and vetting them ahead of time or after the fact? What happens, and what does it mean for you, when the agency says this is fine, we're OK with this? Do you feel protected by those types of representations?

Gregory McLaughlin: It's tough, right? So I'm a firm believer that contracts run smoothly, and any problems that might arise on a project or a contract are solved not through the lawyers. I know it's a funny thing for a lawyer to say, but I have been bred to believe — and I have seen with my own eyes — that problems are solved and contracts run smoothest this through relationships and trust. And when there's a relationship and trust, the contract isn't irrelevant, but it's certainly not the party's first point of reference. In the government space — and so that might lead you to conclude that you can solve all of these problems with trust and discussion and dialogue and agreement. In the government space, that's a little bit different because, of course, there are the procurement regulations. But more importantly, the customer that you're interacting with and giving you comfort that what you want is OK is at least one, if not two, layers abstracted from the agencies that are going to enforce those procurement regulations. Let me try to put a little bit more of context to that. So let's say on an IT project, you might be interacting with the CIO's office and members of the CIO's office team. Those are the people who are going to decide where the servers go or what the design of the network is going to be or whatever. So those are the people with whom you're going to build a relationship and trust. Those are the people who are going to provide you your acceptance when, and say that you've met the acceptance criteria and can move on to the next phase of the project. But those are not the people usually most familiar with the procurement integrity laws. Those are not — yes, they are public employees and it is their responsibility to make sure that the contract remains compliant, but ultimately, they're IT people, and their job is to get the project done. They will have, almost certainly have, a procurement team, and it is their job, it may be their job, to be more familiar with those laws. And you may consider engaging with those folks, and their interpretation might be different from the IT folks, but ultimately, let's say that you can get on the same page as the procurement people.

At the end of the day, it's not the procurement people who are going to bring an enforcement action. It's the IG, the AG, U.S. Attorney's Office. Those folks may have a wildly different view of what the regulations mean and what is, what really constitute a commercially useful function and what work you should be helping a sub with and not be helping a sub with, and what crosses the line into, frankly, conspiracy.

And maybe even, they might even be of the view that your sitting down and discussing and coming to terms with the procurement team evidences an attempt to, itself evidences an attempt to defraud or mislead or collude. So that can be a really, really difficult problem to solve. It could be a particularly difficult issue to advise on because again, my clients, my internal clients, tend to believe that, rightly so, that relationships and trust are critical to the delivery of a project. And so their instinct is going to be to rely on the discussions that they're having with their clients. It's really very hard for them, to help them understand and see the bigger picture that the regulatory authorities are a different entity that might have a very different view.

Brittney Edwards: Yeah, makes sense. And I know, I mean, I guess it depends from prosecutor to prosecutor, but I know sometimes when the U.S. Attorney's Office or whatever agency is looking into this case, they sometimes, they will consult the agency and try to get an understanding of the industry and get the agency's view of is this something that some conduct that is problematic or is this something we should really be pursuing. Because sometimes they'll go to the agency, and the agency will say, no, I kind of see your point, but in reality, this is just how this works, and it's actually better for people if it works this way. So you should not pursue this and prohibit this type of conduct.

Gregory McLaughlin: Sometimes that's successful and can help provide context to a prosecutor, the same way that a context meeting can sometimes help provide context in any kind of criminal enforcement investigation. But sometimes prosecutors or law enforcement are just humorless about it, and they just, they have a different view and they're going to stick to their different view. And it doesn't matter what the industry believes is OK, they will persist in their view that the industry is wrong. I also have seen mixed results with, you may have, an agency might have a mature view that to prosecute or otherwise enforce against a particularly important vendor would be overall detrimental to the taxpayers. I'm not making any "too big to fail" kind of arguments. I'm not making any too big, "so big that you're immune" kind of arguments. But at the end of the day, driving an otherwise reliable vendor out of the state is not necessarily in the best interest of the taxpayers overall. Reduces competition for services, will inevitably drive up prices. But that, rightly or wrongly, that's not, it's not viewed by the prosecutors as part of their job description. Maybe it isn't, but ultimately that perspective is part of the ecosystem that goes into government contracting.

Pre-Contract Risk Assessment and Due Diligence

Brittney Edwards: The next thing I want to go into is risk identification and understanding on, assessing your risk with respect to these certifications and how you combat that risk, what sort of compliance you need to do, and looking at that on a company level and then also on a contract level. How do those differ? What goes into your assessments when you're potentially entering into or bidding on a government contract?

Gregory McLaughlin: You know, it really all depends. It certainly depends on the nature of the contracts, but it also depends on the nature of your company. A large company usually will have pretty robust compliance and diligence processes and procedures, so you would think that at a large company, it's less likely that a DBE that is not a legitimate DBE or that is a risk, at significant risk, to deliver or a significant risk to, on the sly, subcontract and therefore make your certifications of X percent DBE-delivered incorrect because in fact, it's not being delivered by a DBE. So there's a benefit to being a big company, presuming that you have all of these robust procedures, but it's also often, not always, true that a big company can be decentralized enough that they're not as close to the contract, and so when some of those, when some of that behavior starts arising on an individual project, it can take longer for it to be detected. Contrast that with a small company where, smaller companies probably have less robust vetting practices on the front end, but are probably closer to, more invested in, an individual project that's probably a bigger overall percentage of their revenue. And so they have an outsized, it bears an outsized importance in the portfolio. So this kind of then comes back to the balance between diligence and discipline. So you would tend to think that bigger companies are going to be more robust on the diligence but could have a blind spot for discipline and then vice versa. Really, it has to be a balance of the two. That's what I would say at the company-specific level. On the contract-specific level, I think it's really important to make sure that you've carefully read the RFP and make sure that you understand and read down to the level of the detail of the certification. Sometimes the RFP includes in them, in some states or cities have particular issues that they like to see certifications on. And you really just can't assume that as a company, you're going to be able to meet some of those certifications, like compliance with, for example, like the MacBride Principles. So the MacBride Principles relate to the Troubles between Northern Ireland and Ireland in the early 1980s and the IRA and whatnot. And I don't remember, sitting here on the spot today, whether or not it's the IRA or the English, but ultimately the Principles say that the revenue from the contract won't go to support one party or another. And that happens to be of particular importance to some cities and states and agencies and whatnot. And you have to be, just like anything else, you have to be really careful that you don't certify to it when in fact, you can't demonstrate on an auditable basis that you're compliant with it. That would be either fraudulent inducement or some other kind of a false statement.

So again, it comes down to making sure you read the RFP carefully and make sure that you've done your homework internally to make sure that you that all of the certifications as worded in the RFP you can meet.

And it means that you've got to make sure that you've done your diligence on your subcontractors and have thought out and consulted with them about the work that you're expecting them to do, the percentage of that work, make sure that they're the ones who are going to be doing it, how are they going to be doing it, etc. And then on the delivery end, it means making sure –

Brittney Edwards: Can I just stop you right there? So in terms of the due diligence, it seems like there's a lot that could go into it, and, depending on the size of the contract or various other factors, is there a way for you internally, and do you do this, try to make that process more efficient, for example, if you've worked with a particular DBE before? Or are there sort of generalized requirements that you know, at least to some degree, maybe not a specific number or percentage, etc., that you're going to have to comply with that you just kind of keep up to date on those things generally throughout the year, for example, so that when you do have these issues come up, it's not like you're starting from scratch every time to try to do this whole vetting process on the fly or super quickly?

Gregory McLaughlin: Yeah. Certainly, if you're a vendor in the government space, you are already going to have done your diligence and have prepared responses for or have the, are tracking some of the usual questions, like, have you ever been accused of, have you or your officers or directors ever been accused of fraud or convicted of a crime or convicted of a crime related to trust? Have you ever been debarred or suspended on any government contract, etc. And either you have that knowledge sort of in one centralized place, or you have a response that is factually accurate and answers the mail, but is a little bit more generalized. You often find that the vendors in the government space will have core suppliers that they've worked very hard to vet. You'll find that they tend to, if they, if a DBE is one of the core suppliers, they'll be a DBE that they work with over and over again. Of course, that could be self-defeating, right? If you put too much money, too much revenue into a DBE, great for the DBE, but now you've got to find another core supplier DBE.

Brittney Edwards: Is there, are there requirements that you diversify which DBEs you're using, or is it appropriate and OK under the regs or whatever other obligations to pick who you want, unless there's the caveat where the agency itself is saying, "I want you to use this particular DBE," essentially?

Gregory McLaughlin: Right, with that caveat. Sometimes the agencies specify the DBEs. No, really the only consideration is making sure that the DBE, with all of the work that you're giving it, that the DBE is staying an actual DBE and not aging out or sizing out of the program. Other than that, the other thing you can, a big company can do, is just maintain a diverse supply chain in general. And if you can demonstrate on an auditable basis that certain things, that overall you've got an X percentage diverse, of diverse suppliers, in your supply chain and that this good or service came out of that supply chain and therefore should reflect that percentage, you can try to rely on your supply chain as a whole. Not an approach I would recommend taking, if you can avoid it, just because it's a lot harder to demonstrate.

Post-RFP Diligence and Compliance Considerations

Brittney Edwards: That makes sense. What kind of things — well, I guess you are going to get back to the post-RFP phase.

Gregory McLaughlin: It comes down to that diligence. You got to make sure that you, and discipline, make sure that you are staying on top of your DBEs. Make sure that you are auditing the documentation of their delivery, of their showing up on the job, of their sourcing the materials instead of sourcing it through others, and then the discipline if they do decide to, if they do experience difficulty in delivering, to raise that with the agency and not succumb to the temptation to just step in and do it themselves, because that will lead to the potential of a False Claim if you certify that they are the ones who are doing it.

Brittney Edwards: Are there any sort of more generalized processes or practices that you put in place to keep up with these audits periodically, or is this just part of, built into your overall compliance program? How does that work?

Gregory McLaughlin: Well, it should be built into the governance program of the contract. So you should make sure that you've got those audit provisions in your contracts with your subcontractors and that the other terms of your contract are back-to-back with your subcontractor so that the work that they're doing is consistent with the scope that you've promised. And that you are exercising those audits on a frequent enough basis that you don't have a gap risk between the certification in the invoice, if any, and your validation at the subcontractor. So it should be part of governance.

There should be meetings where you're meeting with these folks and asking them these difficult questions. You should be reviewing the documentation that they provide you and noting any discrepancies. And then, of course, you should be showing up at the job site and making sure that they're showing up at the job site, too, and then periodically auditing their paperwork.

It makes for a lot of work, but at the end of the day, it beats having, as, I think it was a Southern District of New York prosecutor once said, "If you think compliance is expensive, try noncompliance."

Brittney Edwards: The ounce of prevention is like, save triple damages.

Gregory McLaughlin: Right, exactly right, is three times the pounds of fewer.

Brittney Edwards: Yeah, so it seems like a lot of it is just really, it comes down primarily to due diligence on the front end, for sure. And on the back end as well in terms of having these auditing procedures and making sure that you're actually following through with them and then documenting what you do so that if something does come up, then you're able to produce something later and say, "Here all the steps that I took to make sure that we're in compliance, and we did vet this," and, just basically evidence your position and defensive.

Gregory McLaughlin: Yeah. I'll give you a concrete example that comes from a recent case. So imagine a scenario where a state Department of Transportation issues an RFP for a bunch of infrastructure projects, and among them is either cabling for a, overhead cabling for municipal transit or it could be painting a bridge, and the non-DBE prime is the one that wins that contract and has identified a DBE painting company as the company that's going to be doing that painting. The scenarios in which an FCA claim might come up there are, the easiest example is, the DBE was set up, what was actually created specifically for that — an employee of the non-DBE prime contacted by the leaders of the non-DBE prime, they created the entity for that person. They had no specific industry knowledge before, no industry contacts, and in the end, in the final analysis, the non-DBE prime was doing all of the sourcing, was taking most of the profits, had a controlling share, notwithstanding the fact that the minority was the nominal head of the company. That's pretty clearly on one side of the spectrum here. That's pretty clearly going to hit a False Claim when the non-DBE prime says, "Oh yes, 5 percent of the contract was done by this DBE. It was this painting right here." Somewhere in the middle of the spectrum would be where the non-DBE prime approaches an otherwise preexisting and totally legitimate DBE, signs them up for the painting, but then it turns out halfway through the contract that they're having staffing issues, they are having financial issues, they're starting to have, are having trouble paying their creditors and they can't meet their requirements on the contract. The non-DBE, knowing that they will be contractually responsible for that failure, steps in and says, "Tell you what. One time only we'll float your bridge loan. Or we will buy those materials for you. Or we'll contact our staffing provider and get you some extra staffing and you can onboard them. And again, we'll do the bridge payments, we'll pay it upfront and then you pay it back to us over time." There are plenty of cases that say that that is an actual conspiracy to — and then, of course, then you have the invoices that certify that that DBE was the one doing the business. There are plenty of cases where prosecutors take the view that that's actually a conspiracy to violate the False Claims Act and a conspiracy to falsify the DBE was the one doing the work. And then on the very other end of the spectrum, I think, would be a situation where non-DBE prime bids the contract, wins the contract, sets X dollars aside for the DBE. The DBE has the skills to do it, but are not normally staffed at the level to provide 10 people for a short period of time on that contract. So instead, they go to a staffing provider who provides short-term staffing, and they bring those folks on. Now some of that revenue is passing through the DBE to the staffing provider, who, let's just stipulate, is not a DBE. Where does that fall on the line? Personally, I haven't read a case, maybe there is one out, there that decides. To me that's awfully close to the line. The DBE is the one sourcing that material. They're the one who are supervising the people, doing the work. But the actual human resources are coming from a non-DBE. Where does that land? Now, for the non-DBE prime, you would hope that the scienter requirement would be a defense here. Of course, obviously if you're helping the falsification of the documents, you need the scienter requirement. If that sort of middle phase case, you might argue that you had a reasonable and fair belief that by doing these things on a temporary basis, you were going to help the DBE deliver overall. Hasn't been entirely successful so far. And then, of course, in the third case where you have no knowledge that the DBE is sourcing or otherwise outsourcing, you should have a defense. I should note here you might be tempted to think that if the contract's DBE requirement is merely aspirational, that that can't possibly meet the materiality standard, but that's not how the cases have gone. You still have to demonstrate that it was material to the agency and that the agency wouldn't have paid you if they knew that you were, that you weren't meeting the requirements. And there are a number of cases where the agency was, the certification wasn't being made, but the agency was still paying. In that case, the courts say, "Well, that doesn't meet the materiality requirement. There wasn't any certification. Clearly, they didn't care." But a lot of the cases are finding materiality even on aspirational requirements.

Final Thoughts

Brittney Edwards: And I wonder if, to some extent, especially in the grayer area, as it comes down to, there are various factors that the courts will look at in making these types of assessments. And I guess overall you want to come out on the side where you can demonstrate that you're taking the effort or making the efforts to do the diligence and follow up. So while you may not have actual knowledge, you're not getting pulled into the reckless disregard or the other, broader theories of knowledge that have been accepted as imposing liability.

Gregory McLaughlin: You got to have a defensible process that seems robust enough that it should identify these things, and then you got to follow the process. And that's sort of blocking and tackling. There's a lot of opportunity in the state and local market. State and cities and municipalities and whatnot do a lot of procurement, but it's not unreasonable for them to expect taxpayer dollars, or taxpayers to expect that taxpayer dollars, are spent responsibly and in compliance with the policy priorities that have been set out. The promotion of DBE enterprises is clearly one of those important policy priorities. Certainly, there's every indication that it is high on the priority list for the Biden Administration and lots of other cities and towns and states, and rightly so.

But the point is that with that opportunity comes the requirement that you can fly and that you live up to the expectation of the government and of the taxpayers that you're going to be following through on their explicit — made explicit, they're not hiding the ball — these explicit priorities that you are saying you are complying with. You can't be cavalier about that stuff.

Brittney Edwards: The other point, too, is the way that these things come up, a lot of times because it's the False Claims Act, it will be a realtor who files a case that may be under seal for several years and you don't even know about it. So it's not like, I mean, you can do what you can do internally and that's all you can really control, because relators may have various different motivations in terms of bringing these cases. It also may be a situation where the case is several years old. So unless the government is looking at this seriously and feels maybe they need to issue a CID or otherwise bring this to your attention, you may have no idea that this is even going on or an issue. You just never know.

Gregory McLaughlin: Yeah, we could do a whole 'nother session on whistleblower claims and whistleblower motivations and how to handle them. The bottom line is you've got to take them really, really seriously and take every single one seriously and look into every single one, irrespective of what you think of their motivations or what you think of the claims. And they are particularly, they are, they need to become a priority. And, as you say, this isn't just the government doing the enforcement here. It could well be private citizens who, maybe, if the government has, if there's two layers removed between your client and the government and the regulatory enforcement agencies, there's a whole 'nother layer of abstraction with the plaintiffs' bar and with relators and whistleblowers. And their view of what the public procurement laws require and what appropriate conduct is could wildly differ from anything that you think is even within the ballpark of what you think those rules actually require.

Brittney Edwards: Makes sense. All right. Thanks for joining me today.

Gregory McLaughlin: Yeah, thanks for having me. This is great. Really appreciate it.

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