Section 8(a) of the Small Business Investment Act of 1958 authorizes the Small Business Administration (“SBA”) to enter into prime contracts with federal agencies and to subcontract the performance of the contract to qualified small businesses. As most are aware, the 8(a) program is designed to assist “socially and economically disadvantaged small business” concerns that are owned by one or more individuals who are from a socially and economically disadvantaged group and whose management and daily operations are controlled by such individuals. 15 U.S.C. § 637(a)(4)(A)-(B). Included in the definition of “socially and economically disadvantaged groups” are, among others, Indian tribes, Native Hawaiians, and Alaskan Natives, which allows each “maximum practical opportunities” to participate in the government contracting market. But in so doing, those companies must stomach the good with the bad, i.e., they must be prepared to (a) navigate the thicket of regulatory hurdles required to do business with the government and (b) combat potential allegations of fraud if there is a perception that one or more of those hurdles has not been cleared successfully.
A recent case in point involves the former chief compliance officer of an Alaskan Native Corporation (“ANC”) who filed a False Claims Act suit against his former employer, Afognak NC, and its principal contracting subsidiary, Alutiiq, LLC. See U.S. ex rel. Ben Ferris v. Afognak Native Corp., et al., Civ. No. 3:15-cv-00150 (D. Ak). As seasoned government contractors know all too well, the False Claims Act (31 U.S.C. §§ 3729-3732) is an anti-fraud statute that authorizes whistleblowers to initiate a civil action on behalf of the United States to recover damages and civil penalties on behalf of the U.S. government arising from false or fraudulent statements, claims, and acts in violation of that statute. Last month, after four years of bruising litigation that included transfers among three separate federal courts, a $169,994 sanction award, and numerous procedural battles, the case settled for an undisclosed sum.
The Factual Allegations in the Afognak/Alutiiq Complaint
The Complaint alleged that Afognak NC, through its wholly owned subsidiary, Alutiiq, had been awarded hundreds of millions of dollars in various government contracts in the period between 2007 and 2015. The Complaint further alleges that in its submission of bids for these contracts, Afognak and Alutiiq represented that particular subsidiary small business entities were qualified under the SBA’s 8(a) program and would perform the contracts in compliance with the program’s various legal requirements. Once a contract was awarded, the government made payment under the contract based upon these representations and certifications regarding the 8(a) business entity that agreed to perform the contracted work.
However, the Complaint goes on to allege that the various 8(a) subsidiary companies that Afognak and Alutiiq used to bid for these contracts were actually sham entities that existed only on paper “as names on bids and invoices.” See Second Amended Compl. ¶ 2 (ECF Docket No. 217). The relator charged that:
These 8(a) companies are cycled through the bidding process, thereby obtaining government contracts, and eventually capture so much business for themselves that they become too big to qualify for subsequent bids. By employing these sham companies while illegally misrepresenting to the Government that the companies were real and performed the contracts at issue, Afognak NC has freed up a central core of employees to assign to whatever contract arises, thereby gaining unfair competitive advantages over other native Alaskan companies. . . . In actuality, it is the business divisions within Alutiiq’s corporate structure that bid on and perform the government contracts on a nationwide basis. . . . The 8(a) entities exist merely as conduits to obtaining government contracts which would otherwise be available only to qualified 8(a) small business entities.
Id. ¶¶ 2, 5.
The relator alleged that Afognak and Alutiiq ignored the SBA’s rules and requirements for participation in the 8(a) Business Development Program and fraudulently certified small business entity eligibility to participate in several government contracts, worth many tens of millions of dollars. While under the defendants’ direction, employees from Afognak’s various divisions allegedly performed the contracted-for work with no involvement from the 8(a) subsidiaries. This ran afoul of SBA guidelines because, while indeed an ANC, Afognak as a corporation is one of the largest ANCs – with more than 5,000 employees located throughout the country and around the world – and was therefore no longer considered “small” in the eyes of SBA. These allegations formed the basis of the relator’s False Claims Act violations.
As all federal contractors know, any False Claims Act suit is high-stakes litigation. The statute provides not only for civil penalties up to $22,363 (and adjusted annually for inflation) for each alleged violation, but also for a treble damages award multiplier in place of actual damages suffered by the government as a result of such violations. The claims asserted in the Afognak suit serve as a timely reminder of the importance of regulatory compliance and proper certifications for all tribally owned corporations, ANCs, and Native Hawaiian organizations that participate in the SBA’s 8(a) Business Development Program. Noncompliance with 8(a) rules not only risks a company’s exclusion from further participation in this program (which annually awards billions of dollars in government contracts), but also risks False Claims Act litigation exposure on the order of many millions of dollars in damages, penalties, and attorneys’ fees.
Lessons for Other ANCs, NHOs, and Tribally Owned Corporations
Small business concerns eligible to participate in the 8(a) program need to take care to assure that their corporate formalities, operations, and certifications to the government are fully compliant with all SBA rules and regulations. This task requires a carefully constructed plan to ensure that each small business (1) meets size requirements under the applicable North American Industry Classification System (NAICS) code(s); (2) properly accounts for and tracks the relevant contract dollar amount, or “cap,” that a small business entity may not exceed under the program; (3) avoids affiliation and operational risks; (4) performs the percentage of work required under the contract and relevant regulations; (5) graduates from the 8(a) program within nine years; and (6) otherwise maintains good standing within the program. As this case makes crystal clear, compliance is critical to business survival.