Government Contracts Monitor

That Little White Lie Can Be Very Costly Under the Special Plea In Fraud Statute and False Claims Act

July 28, 2014

The recent Federal Circuit opinion in Veridyne Corporation v. United States, No. 2013-5011 (Fed. Cir. July 15, 2014), is a cautionary tale about not trying to game the system to take advantage of a contractor’s expiring 8(a) status.

Veridyne Corporation (“Veridyne”) was a successful federal contractor that participated in the Small Business Administration (“SBA”) 8(a) program. Veridyne had a contract to provide services related to the U.S. Department of Transportation’s Maritime Administration (“MARAD”). About a year before Veridyne was scheduled to graduate from the 8(a) program, Veridyne approached MARAD about negotiating a modification/extension to the existing indefinite delivery, indefinite quantity contract before Veridyne graduated from the 8(a) program. At that time, if the new contract award price exceeded $3 million, it would be subject to open competition between SBA-qualified businesses and could not be awarded as a sole-source contract. On the other hand, if MARAD opened up the new contract to competition, the process would delay the award until after Veridyne graduated from the 8(a) program, hence risking Veridyne’s ability to retain the work – which both Veridyne and MARAD wanted.

As part of the contract discussions with MARAD, Veridyne certified that the new contract would not exceed “$3,000,000 in the aggregate.” This statement, however, was a lie because Veridyne knew that the value of the services to be provided under any contract extension could easily exceed ten times that amount. Veridyne, however, did not act alone. Some MARAD officials “knew that the $3 million amount was merely a pretext to get around having to award [the new contract] subject to competition.” MARAD requested that the SBA approve the new contract to Veridyne without opening it to competition. As part of MARAD’s request, MARAD sent the SBA Veridyne’s false cost and pricing information. Shortly thereafter, “MARAD, Veridyne, and the SBA executed the new contract extending the service contract known as Modification (‘Mod’) 0023, which had been drafted by MARAD to reflect Veridyne’s proposal.”

Over the course of the original contract and Mod 0023, MARAD paid Veridyne $31,134,931.12 for work performed. These payments were based on approximately 119 invoices. In the waning days of the contract, Veridyne submitted an additional 8 invoices (invoices 260-267) which MARAD refused to pay, after the U.S. Department of Transportation’s Inspector General concluded that Mod 0023 was obtained based on fraud by Veridyne.

Veridyne submitted certified claims on invoices 260-267, which MARAD denied. Veridyne then filed suit in the U.S. Court of Federal Claims seeking to recover $2,237,163.96 on invoices 260-267. The Government entered a defense under the Special Plea in Fraud statute and counterclaimed for a civil penalty under the False Claims Act and for a penalty under the antifraud provision of the Contract Disputes Act. The U.S. Court of Federal Claims entered a split judgment, finding Veridyne was entitled to some money under a theory of quantum meruit for work it actually performed and awarding the government civil penalties. Both sides appealed.

The Federal Circuit came down squarely on the side of the government. It held that because Veridyne had engaged in fraud to enter a contract to perform services for MARAD, all of Veridyne’s claims were based on a fraud. As a result, all of Veridyne’s claims were barred by the Special Plea in Fraud Statute, 28 U.S.C. § 2514. That statute states: “A claim against the United States shall be forfeited to the United States by any person who corruptly practices or attempts to practice any fraud against the United States in the proof, statement, establishment or allowance thereof.” In this case, the fraud at issue was Veridyne’s false $3 million cost estimate, which served as the underlying foundation for contract award to Veridyne. The Federal Circuit went on to add that because Veridyne’s contract claims were barred by the statute, any quantum meruit claims were also barred by the Special Plea in Fraud Statute. As a result, the Federal Circuit reversed the $1,068,636.22 award to Veridyne.

The Federal Circuit then went on to affirm the award of $1,397,000.00 in civil penalties to the government based on the maximum penalty permitted by law ($11,000) on each of the 127 invoices Veridyne had submitted pursuant to Mod 0023. In support of this decision, the Federal Circuit clearly held “that claims submitted pursuant to a fraudulently obtained contract are FCA violations even if the claims themselves do not contain false statements.” The only silver lining in this case was that the government chose not seek to recover the $31,134,931.12 MARAD had paid to Veridyne for performance on Mod 0023 or the triple damages (nearly $100 million) to which it appears the government was otherwise entitled to seek pursuant to the False Claims Act, 31 U.S.C. § 3729(a)(1).

As this case demonstrates, a little white lie to get a sole source contract award and avoid full and open competition can have huge and potentially devastating consequences in the future.

Michael J. Schrier is the attorney responsible for the content of this article.