By David B. Robbins
The surety industry has closely monitored the progress of the False Claims Act (FCA) case, United States ex rel. Scollick v. Narula (1:14-cv-01339 (D.D.C.)) through the court system. This attention is deserved, as the case may portend a wave of FCA risks for surety professionals (surety companies, agencies, and producers alike) when issuing Miller Act bonds to construction contractors building on government facilities.
In Scollick, a former employee of a construction company filed a FCA lawsuit against several companies, their owners, the bonding agency, the bond producer, and the sureties that bonded the federal construction projects in question. The complaint alleges that the owners established shell companies to obtain certain bidding preferences that enabled these companies to be awarded sole-source, set-aside government contracts. The court determined that the allegations against the bonding agency, the bond producer, and sureties (Bond Defendants) were sufficient to survive a motion to dismiss. Specifically, the amended complaint alleged that the Bond Defendants had obtained information through the underwriting process that should have tipped off the sureties that the principals they were bonding had violated government contracting requirements for eligibility in preference programs for small and disadvantaged businesses. Meanwhile, the case proceeds. The parties have informed the court that they intend to hold a settlement-focused mediation in March 2020.
Absent a decisive victory for the surety defendants in Scollick that forecloses the possibility of future liability (which at this point seems unlikely), the surety industry as a whole is well advised to consider a number of potentially risk mitigating steps, described below.
- Train Producers and Surety Company Professionals Who Interact with Principals and Approve Bonds on Government Contracts Set-Aside Program Requirements
As it relates to surety industry professionals, the central thrust of the Scollick case is that producers and sureties cannot ignore government contracting set-aside program eligibility requirements. Evidence of admission into, or self-certification of eligibility for, set-aside program membership may not be sufficient. If surety industry professionals ignore or fail to understand “red flags” about potential ineligibility, FCA risk increases. Basic training on the eligibility requirements for various types of set-aside programs in government contracting is important, as ignorance of these requirements is not likely to be a defense to future FCA allegations.
- Train Surety Professionals on Red Flags
There is a natural mismatch between the surety industry’s need for comfort that a principal is a good financial risk and the government’s requirements that principals be small, disadvantaged, or otherwise needing the help of a set-aside contracting program to grow. Surety industry professionals will explain the risk presented by a principal in terms of construction support from other businesses and financial and other resources available to support the project. But when the language involves phrases such as “the business is really controlled by” or “another company performs all the work” or “this is a paper prime contractor only,” FCA risk increases. Surety industry professionals need to be aware of how these phrases can be misconstrued later during enforcement inquiries. If surety professionals find themselves questioning a small business’s eligibility for set-aside contracting status, or finding a small business wholly incapable of performing a project without extensive assistance from others, these potential red flags deserve further review and attention.
- Train Surety Professionals to Ask, Appreciate, and Answer Questions
A hallmark of past surety industry practice, especially as it relates to smaller companies, is a fear that additional questions might cause the principal to move to a different surety. Producers have also often run interference for principals to help them avoid answering onerous numbers of questions. Given the additional risks posed by Scollick, this dynamic needs to end. Questions are a sign of an appropriately attentive industry professional. Questions should be expected, and answered. Otherwise, non-answers or unwillingness to answer should be considered as red flags.
- Decide on Levels of Acceptable Risk as an Organization
FCA risk can been substantial. The government’s starting position in fraud cases involving small business is that the measure of damages to the government is the full value of the contract. While this is a rebuttable presumption of loss, it is worth emphasizing that the government’s opening position is to treble the total amount spent on a set-aside construction project plus statutory per-invoice penalties, which can be more than $20,000 each invoice. Surety professionals are well advised to consider their risk and set decision-making authority at a high enough level within the organization to help mitigate that risk.
- Involve the Legal Department (and Outside Counsel) as Necessary
It can be difficult to determine whether a principal is eligible for set-aside contracting. There are times when, despite best efforts, surety industry professionals will make a mistake a miss an eligibility issue. Well-meaning business mistakes in interpreting eligibility are not, in and of themselves, violations of law or regulation. But surety professionals need to be able to demonstrate sufficient diligence occurred to defend against future enforcement inquiries. The legal department, along with outside counsel as necessary, can be helpful in conducting sufficient diligence.
False Claims Act risk for surety industry professionals is growing, and may increase substantially depending on the ultimate resolution of the Scollick case. Surety professionals may wish to consider these steps to help manage this heightened risk.
David B. Robbins is a partner in Jenner & Block's Washington, DC office and has extensive experience with False Claims Act litigation and investigations, including in the surety industry related to the construction of government buildings. Robbins ran the U.S. Air Force’s global Procurement Fraud Remedies Office and served, among other roles, as Deputy General Counsel (Contractor Responsibility). Robbins has a broad-based practice, and he is also the principal author and editor of the forthcoming American Bar Association peer-reviewed book entitled The Procurement Fraud Guidebook: The System, Stakeholders, and Response Strategies. He can be reached at drobbins@jenner.com or 202.639.6040.