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Scollick Memorandum Opinion – Sureties and Producers Breathe a Limited, Fact-Specific Sigh of Relief

  

By David Robbins

Co-Chair, Government Contracts Practice of Jenner & Block 

The saga of the False Claims Act case U.S. ex rel. Scollick v. Narula et al. took a pro-surety and pro-producer turn recently when Judge Lamberth dismissed all claims against the “insurance defendants.” Judge Lamberth issued the decision under seal on July 19 and unsealed the decision last Friday, July 29.

Plaintiff-relator alleged that sureties and producers could be liable under the False Claims Act for failing to disclose to the Government supposedly superior knowledge that a principal was not eligible for set-aside contracting (here, service-disabled veteran owned small business, or SDVOSB, contracting). While the decision is fact-specific and may not help sureties and producers end suits before summary judgement, the decision has helpful language for the insurance industry.

Judge Lamberth notes, the 

‘“most important issue running through all [these claims] is the knowledge possessed by the [i]nsurance [d]efendants.” But plaintiff-relator has produced no evidence permitting a reasonable jury to find that the insurance defendants had knowledge of the construction defendants’ fraud—“that they were fraudulently asserting status as SDVOSBs.” Because such knowledge is an essential element of all of the claims brought against the insurance defendants, the Court must grant summary judgment in their favor.’ 

(p. 23, internal citations omitted.) 

In addition to faulting Plaintiff-relator for failing to proffer facts about producer and surety knowledge of violation of SDVOSB set-aside rules, the Court noted the tremendous duty Mr. Scollick’s theory would impose on the industry. In declining to impose a need to understand specifics of government contracting rules, the court notes that doing so is “no ‘simple step,’ for the insurance defendants. This would impose a significant duty on third party insurers to familiarize themselves with [Veterans Administration] regulations before bonding companies. It is a significant leap in terms of liability. Without facts indicating that the insurance defendants knew of the specific SDVOSB requirements, this Court will not impose an affirmative duty on insurance and bonding companies to double-check the government’s verification.” (p. 25, internal citations omitted.)

Particularly helpful in future cases, the Court places the burden of complying with small business set aside rules in this case squarely upon the principal. “[W]hile there is no doubt that participants in federal programs must familiarize themselves with the requirements, the insurance defendants are not “participants” in the federal VA SDVOSB program—the construction defendants are. It is the construction defendants who are obligated to familiarize themselves with the SDVOSB regulations, because they are dealing with and seeking payment from the federal government. . . . Plaintiff-relator has cited no cases—and the Court can find none—that place this obligation on a third-party insurer or bond underwriter.” (p. 25-26, internal citations omitted.)

Indeed, the Court faults Plaintiff-relator for trying “to construct a duty out of thin air” that insurance industry participants should have a “basic familiarity” with the concepts behind set-aside contracting. “But plaintiff-relator cannot point to any court recognizing this third-party burden for bonding companies, which ensure [sicall federal contracts—not just SDVOSB-eligible ones.” (p. 26-27, internal citations omitted.)

While this decision is not a panacea for sureties and producers, the decision will help the insurance industry push back on the increasingly common claims that superior knowledge of a principal’s business, without more, is sufficient for False Claims Act liability.

See a more detailed analysis by Robbins, here


David B. Robbins is Co-Chair, Government Contracts Practice and a partner in Jenner & Block’s (https://jenner.com/) Washington, D.C. 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 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.

 
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