Organizational Conflicts of Interest – Part 3: FCA Enforcement’s Next Target | Sheppard Mullin Richter & Hampton LLP

In the first two parts of this series, we summarized what constitutes an organizational conflict of interest (“OCI”) in public procurement and discussed the importance of OCI in the bid challenge arena. But lest you think that after clearing the hurdle of protest you are now free from any harm caused by having an OCI, we now address the potential liability after attribution arising from OCI undisclosed and unmitigated. Contractors who have undisclosed and unmitigated OCI, which existed prior to award or arose subsequently, may face a variety of adverse outcomes – contract termination, suspension or exclusion, and liability for fraud under the False Claims Act (“FCA”). Remember that OCIs come in three forms:

  1. Unfair competitive advantage – when a contractor obtains confidential or proprietary government information not available to competitors
  2. Impaired objectivity – where performance of the contract could affect a contractor’s other financial interests
  3. Skewed ground rules – when a contractor helps design the statement of work or other tender requirements for a future procurement for which they ultimately submit a proposal

OCIs are often not easy to identify and can also be triggered by a company’s contractors. Although government contracting officials are ultimately responsible for determining whether an OCI exists, contractors must disclose any actual or potential OCI that may arise during contract performance, their plan for handling such OCI, and have a continuing obligation to disclose if new OCIs develop during execution. . Alternatively, contractors must certify that no OCI exists, and these certification requirements continue throughout the performance of the contract.

It is important to understand what creates potential OCIs and assess them properly for each procurement, as undisclosed OCIs can expose the contractor to potential FCA liability. For example, under the FCA’s fraudulent inducement theory, liability may arise where the government is able to demonstrate that the contract was obtained by fraud, such as by knowingly making false statements or certifications when negotiations. The theory behind this type of FCA claim is that the initial false certification taints the rest of the contract. As a result, contractors can be held liable under the FCA for every payment claim they submit to the government as a result of false OCI certification, even if the contractor was not explicitly aware of the claim. OCI or did not specifically intend to defraud the government – ​​under the FCA, reckless disregard for the truth and falsity of OCI certification is sufficient to establish liability. The government likes this theory of liability in particular because liquidated damages and fines per claim can extend to every invoice submitted during the term of the contract.

Companies have already suffered CAF judgments based on OCI. In June this year, the government settled FCA’s OCI-related allegations against Cape Henry Associates (“CHA”), a small business owned by disabled veterans and specializing in workforce analysis , personnel analysis and training services. The government alleged that CHA failed to disclose several OCIs with its subcontractors on several government contracts. In one instance, the CHA hired a subcontractor in which one of the CHA officers had an equity interest to perform work under a federal contract. The government claimed that this created an OCI, likely because the CHA’s objectivity was compromised when it selected a contractor that would financially benefit one of the CHA agents. In another instance, CHA subcontracted with an employee of its contractor, and that employee was simultaneously providing consulting services and making recommendations to the government client that could have impacted CHA’s government funding and project approvals. In addition to CHA paying $425,000 in settlement, CHA could also face damage to its professional reputation, as well as administrative action, such as suspension and expulsion. The DOJ press release noted a formidable list of government entities involved in the investigation, including the DOJ’s Civilian Fraud Section, the Army CID, the GSA Inspector General’s Office and Navy Criminal Investigative Service.

In 2003, the 4th Circuit Court of Appeals upheld an FCA judgment against Westinghouse Savannah River Company for a similar subcontracting dispute. Westinghouse solicited bids and engaged a subcontractor General Physics Corporation (“GPC”) to provide training services under the contract, certifying to the Department of Energy that there was no OCI. GPC also certified to Westinghouse that it was not aware of any OCI in the supply. However, one of GPC’s employees had helped draft Westinghouse’s request to the DOE for approval to enter into the subcontract, creating an unfair competitive advantage for OCI. The 4th Circuit upheld the district court’s ruling that Westinghouse’s OCI certification was false, that at least one employee knew it was false at the time of submission, and that the false certification was material to the DOE because OCI certification is an important part of maintaining a fair bidding process. With respect to materiality, the court found it immaterial that the DOE knew of the existence of the OCI with GCP and investigated the OCI and continued to fund the subcontract. – contracting anyway. (It is hoped that the proof that the fake OCI certification has been In fact not important for the government would go further in a post-Escobar test). Ultimately, the court determined that the government suffered no damages, but Westinghouse was still liable for penalties for each invoice submitted under the contract under a theory of fraudulent inducement.

Given the potential liability caused by OCI, contractors should pay particular attention to potential conflicts both internal and involving their subcontractors. When performing an OCI certification, contractors should carefully consider their past and current government contracts that could create a conflict, as well as contracts belonging to their subcontractors, subsidiaries, and affiliates, or risk potentially serious liabilities.

Aubrey L. Morgan