Joseph P. Hornyak is a partner in Holland & Knight's Northern Virginia office.

In a Memorandum Opinion issued on June 17, 2016, the U.S. District Court for the District of Columbia applied the so-called "presumed loss" rule to assess the full contract value as the measure of the government's loss for purposes of sentencing an individual convicted of misusing the SBA's 8(a) program to win set-aside contracts. See United States v. Singh, Criminal Action No. 15-173 (RBW) (D.D.C. Jun 17, 2016). This appears to be the first published court decision enforcing the controversial rule since its passage by Congress as part of the Small Business Jobs Act of 2010.

As brief background, prior to the 2010 Jobs Act, the Government had difficulty proving damages under the False Claims Act where a contractor misrepresented its size or socio-economic status to win set-aside government contracts. Practically speaking, the Government rarely suffers any actual economic harm in such cases. The fact that an ineligible firm improperly receives a contract set aside for small businesses may violate public policy, but it rarely increases the price of the contract.

Section 1341 of the Jobs Act purported to address this issue by establishing a rebuttable presumption. Specifically, the statue provides that where a firm willfully misrepresents fits size or status to receive the award of a federal contract, subcontract, grant or cooperative agreement that has been set aside for small businesses, the loss to the government is presumed to be the "total amount expended" by the government under the contract, subcontract, grant or cooperative agreement. See our blog post on the 2010 Jobs Act.

In 2013, the Small Business Administration (SBA) issued final regulations implementing section 1341 of the Jobs Act. The regulations state in part that the presumed loss rule "may be determined not to apply in the case of unintentional errors, technical malfunctions, and other similar situations that demonstrate that a misrepresentation of size was not affirmative, intentional, willful or actionable under the False Claims Act ...." 13 C.F.R. § 121.108(d).

Turning back to U.S. v. Singh, the defendant in that case was found to have used his status as a disadvantaged individual to obtain 8(a) status for his company. After his company completed its term in the 8(a) program, the defendant formed a second company that applied for and received 8(a) certification, and thereafter won 26 contracts under the 8(a) program with a collective amount of over $8 million, but using almost entirely the resources of the previous, gradated company. The defendant pled guilty to violating the Major Fraud Act.

In sentencing phase, the Government argued that the loss it suffered as a result of the defendant's misrepresentation was the "full value" of the 8(a) contracts his company was awarded, citing the SBA's presumed loss rule. The defendant argued that the presumed loss rule should not be applied because, despite the misrepresentation, his company "provided valuable services to the government" and made only $28,768 in profit. The Court rejected this argument, construing the SBA regulation "to indicate that the only permissible means by which the presumption of loss may be rebutted would be through the introduction of evidence establishing that one of those circumstances enumerated in 13 C.F.R. § 121.108(d)." In other words, fact that the Government received the exact services it sought to purchase is irrelevant. The Court thus ruled that the amount of the loss to the Government under the fraudulently procured contracts would be deemed to be the full value of the contracts.

If the Singh Court's reasoning is followed by other courts, companies found guilty of misrepresenting their size or socio-economic status to win set-aside contracts may have difficulty rebutting the presumption that the government's loss is equal to the full value of the contract.

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