Organizational Conflicts of Interest – Part 3: The Next Target for FCA Enforcement
In the first two parts of this series, we have summarized what constitutes an Organizational Conflict of Interest (“OCI”) in government procurements, and discussed OCIs’ importance in the bid protest arena. But lest you think that, having passed the protest hurdle, you are now free from all harm caused by having an OCI, we now address potential post-award liability stemming from undisclosed and unmitigated OCIs. Contractors found to have undisclosed and unmitigated OCIs, that either existed before award or arose thereafter, can face a variety of bad outcomes—contract termination, suspension or debarment, and liability for fraud under the False Claims Act (“FCA”). Recall that OCIs come in three forms:
Unfair Competitive Advantage – when a contractor obtains confidential or proprietary government information not accessible to competitors
Impaired Objectivity – when contract performance could affect a contractor’s other financial interests
Biased Ground Rules – when a contractor helps design the statement of work or other solicitation requirements for a future procurement for which they ultimately submit a proposal
OCIs often are not easy to identify and also can be triggered by a company’s subcontractors. Although government Contracting Officers ultimately are responsible for determining whether an OCI exists, contractors must disclose all actual or potential OCIs that might arise in performing the contract, their plan to handle those OCIs, and have a continuing obligation to disclose if new OCIs develop during performance. Alternatively, contractors must certify that no OCI exists, and these certification requirements continue throughout performance of the contract.
It is important to understand what creates potential OCIs, and to properly evaluate them for each procurement, because undisclosed OCIs can subject the contractor to potential FCA liability. For example, under the fraudulent inducement theory of the FCA, liability can arise when the government is able to show that the contract was procured by fraud, such as through knowingly making false statements or certifications during negotiations. The theory underlying this type of an FCA claim is that the initial false certification taints the remainder of the contract. As a result, contractors can be liable under the FCA for every claim for payment they submit to the government following a false OCI certification, even if the contractor did not explicitly know about the OCI or specifically intend to defraud the government – under the FCA, reckless disregard of the truth and falsity of the OCI certification is enough to establish liability. The government likes this theory of liability in particular because the damages and per-claim fines can extend to every invoice submitted over the life of the contract.
Companies already have suffered FCA judgments based on OCIs. In June of this year, the government settled OCI-related FCA allegations against Cape Henry Associates (“CHA”), a Service Disabled Veteran Owned Small Business specializing in manpower analysis, personnel analysis, and training services. The government alleged that CHA failed to disclose multiple OCIs with its subcontractors on several government contracts. In one instance, CHA hired a subcontractor in which one of CHA’s officers had an ownership interest to perform work on a federal contract. The government claimed this created an OCI, presumably because CHA’s objectivity was impaired when it selected a subcontractor that would financially benefit one of CHA’s officers. In another instance, CHA subcontracted with an employee of its subcontractor, and that employee was simultaneously providing advisory services and making recommendations to the government customer that could have impacted CHA’s government funding and project approvals. In addition to CHA paying $425,000 in settlement, CHA also could face damage to its professional reputation, as a well as administrative actions, such as suspension and debarment. The DOJ press release noted a formidable list of government entities involved in the investigation, including the DOJ’s Civil Fraud Section, the Army CID, GSA Office of Inspector General, and the Naval Criminal Investigative Service.
In 2003, the Court of Appeals for the 4th Circuit affirmed an FCA judgment against Westinghouse Savannah River Company for a similar subcontractor conflict. Westinghouse solicited bids and hired subcontractor General Physics Corporation (“GPC”) to provide training services under the contract, certifying to the Department of Energy that there was no OCI. GPC similarly certified to Westinghouse that it knew of no OCI in the procurement. However, one of GPC’s employees had helped draft Westinghouse’s request to DOE for approval to enter the subcontract, creating an unfair competitive advantage OCI. The 4th Circuit affirmed the district court’s ruling that Westinghouse’s OCI certification was false, that at least one employee knew it was false at the time of submission, and that the false certification was material to DOE because the OCI certification is an important part of maintaining a fair bid process. On materiality, the court held that it did not matter that DOE knew about and investigated the OCI with GCP and continued funding the subcontract anyway. (One hopes the evidence that the false OCI certification was in fact not material to the government would go further in a post-Escobar trial). Ultimately, the court determined the government had not suffered any damages, but Westinghouse was still on the hook for penalties for every invoice submitted under the contract under a fraudulent inducement theory.
Given the potential liability caused by OCIs, contractors should pay special attention to potential conflicts both in-house and involving its subcontractors. When making an OCI certification, contractors must think carefully about their prior and ongoing government contracts that might create a conflict, as well as the contracts belonging to their subcontractors, subsidiaries, and affiliates, or risk potentially severe liabilities.