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“Presumed Loss” Rule: Size Misrepresentations Now Even More Costly

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78 Fed. Reg. 38811, which became effective on August 27, 2013, implements certain provisions of the Small Business Jobs Act of 2010. Most notably, the new regulation states that “there is a presumption of loss equal to the value of the contract or other instrument when a concern willfully seeks and receives an award by misrepresentation.” In other words, a size misrepresentation to the SBA can result in damages in the full amount of the fraudulently obtained contract; a significant departure from the previous rule. The new rule also provides that: (1) submission of an offeror application for an award intended for small business concerns will be deemed a size or status certification or representation in some circumstances; (2) an authorized official must sign the certification; and (3) concerns are required to update their size or status in ORCA (or a successor database) at least annually.

Departure from Previous Policy

Previously, in cases alleging misrepresentation of SBA size status, the Government had to prove that it was damaged as a result of the misrepresentation. Often, this was a signification bar to potential recovery because damages were hard to establish. Even when the Government could show that a willful misrepresentation occurred, damages were hard to prove if the misrepresenting party still provided a conforming service/product. Under the new rule, proving damages is no longer a hurdle. There is a rebuttable presumption of loss equal to the entire value of the fraudulently obtained contract. Therefore, if a party misrepresents its size status to obtain a $10 million award, they can be on the hook for the entire $10 million – even if the work was done in accordance with contract specifications. Also, the new rule expands the scope of contracts covered by the “presumption of loss” rule. These provisions apply not only to small business set-asides but also to any solicitation that grants a credit or preference for small-business participation. As a result, general contractors must ensure, on all contracts, that even their small-business subcontractors are legitimate small-business entities under the SBA regulations.

What it Means Going Forward

Going forward, this new “presumption of loss” rule creates greater incentives for the DOJ (and qui tam relators) to prosecute SBA misrepresentation cases under the False Claims Act. In that same vein, the potential risks to contractors has increased accordingly. Since a misrepresentation to the SBA now carries with it the possibility of crippling economic penalties, contractors need to take extra precautions when certifying as a small-business.