The U.S. government recently settled with five California masonry companies and two individuals alleged to have vio- lated the False Claims Act (FCA) by misrepresenting themselves as disadvantaged small businesses. The settlements arose out of two qui tam cases—U.S. ex rel. Howard v. Harper Construction, et al., Case No. 7:12-CV-215-D (E.D.N.C.); and U.S. ex rel. Howard v. RQ Construction, LLC, et al., Case No. 7:13-CV-48-D (E.D.N.C.)—brought by the Relator, an employee of one of the masonry companies, Frazier Masonry (“Frazier”). Relator alleged a scheme under which Frazier and its principles created sham small businesses to obtain government subcontracts, and in doing so caused the prime contractors to certify falsely that they had complied with the small business subcontracting requirements in claiming payment under the prime contracts.

These cases, explained in greater detail below, are significant in that they represent a more aggressive pursuit by the government to prosecute FCA claims based entirely upon misrepresentations made to secure subcontract awards under the Small Business Subcontracting Plan requirement of the Federal Acquisition Regulations.

As alleged in the complaints, Harper Construction Company, Inc. (“Harper”), was awarded the prime contract for the Courthouse Bay Project at MCB Camp Lejeune in North Carolina. Following award, Frazier submitted a bid to Harper for the masonry subcontracting work. However, the prime contract required that a certain percentage of the work be performed by disadvantaged small businesses. Since Frazier, one of the largest commercial masonry companies in the United States, did not qualify, the company’s president suggested that he instead use his disabled veteran-owned small business, F-Y, Inc. (“F-Y”), for this subcontract.

As further alleged, it became clear to Relator that F-Y was merely a front—a sham veteran-owned small business used to obtain the masonry subcontract. F-Y apparently had only two employees. Further, the billing and performance arrangements between Frazier and F-Y demonstrated that the two companies were inextricably intertwined, and that the performance and management of the masonry subcontract was actually done entirely by Frazier.

Relator also alleged that this sham had been used by Frazier several times over the last seven years for projects on the West Coast, including at Camp Pendleton, not only with F-Y, but with other similar companies as well. Relator identified numerous connections between Frazier and the other companies—e.g, common personnel and shared addresses—which indicated that Frazier both owned and controlled them. Additionally, Relator described a similar scheme involving Frazier and other prime contractors, including RQ Construction, LLC.

In essence, Relator alleged that although these prime contractors technically contracted with F-Y and the other ma- sonry subcontractors to perform the masonry work on certain government projects, these companies were merely sham disadvantaged small businesses that do not qualify as “small businesses” under the Small Business Act (SBA) because they are “affiliates” of Frazier under the SBA affiliation rules. See 13 C.F.R. § 121.103. Relator therefore brought qui tam actions claiming that F-Y and the other subcontractors violated the FCA by misrepresenting themselves as small disadvantaged businesses and caused the prime contractors to make false certifications that they had complied with the small business subcontracting requirements of the prime contracts in their claims for payment to the gov- ernment.

The government elected to intervene as against F-Y and the other subcontractors, and recently settled the claims for nearly $1.9 million. In its press release, the DOJ explained its view that these settlements demonstrate the govern- ment’s “continuing vigilance” and “aggressive investigative efforts” to ensure the integrity of its programs and protect taxpayer money.

Although the announced settlements involved only the subcontractors, prime contractors should be aware that the government could also pursue claims against them based on subcontractor size and status misrepresentations. In satisfying their obligations under SBA’s small business subcontracting rules, including compliance with their Small Business Subcontracting Plan, prime contractors are cautioned that the government may pursue FCA claims against them if it believes that the prime contractors “knowingly” submitted false claims to the government based on a sub- contractor’s misrepresentation, as that term is defined in the FCA.