Law360, New York (August 18, 2014, 7:47 PM ET)-- The American Small Business League on Monday criticized a proposed safeharbor from fraud penalties for large businesses that inadvertentlymisrepresent themselves as small businesses, saying that the provision is aloophole that invites ineligible businesses to illegally bid on small businesscontracts.
The SmallBusiness Administration proposed a new regulation on June 25 that wouldcreate a "safe harbor" for ineligible companies that misrepresent themselves assmall business contractors due to clerical errors or a misunderstanding of newregulations. The agency has said that the proposal would improve enforcement oftougher small business contracting rules by preventing honest mistakes fromtriggering newly increased penalties, including criminal sentences of up to 10years in prison.

But the ASBL said that the SBA's  proposal makes it too easy for largebusinesses to claim that they acted in good faith when they're caught trying tobend the SBA's eligibility rules.

"Legitimate small businesses could lose billions of dollars a year in federalcontracts as the penalties for hijacking federal small business contracts areessentially removed," the ASBL said. "Every year for a decade the SBA Office ofInspector General has named the diversion of federal small business contractsto large businesses as the number one problem at the SBA. The SBA hasconsistently refused to adopt any policies to halt the rampant fraud."

The SBA is still seeking feedback on its proposal, and will accept publiccomments until Aug. 25.

The proposal aims to enact a January 2013 change to the Small Business Act thateliminates penalties for companies that act in good faith after seekingadvisory opinions on their small business status from Small BusinessDevelopment Centers or Procurement Technical Assistance Centers.

The agency said that it doesn't expect the safe harbor to impact manycompanies, and that the number of companies fraudulently claiming smallbusiness status remains small. In 2010, for example, the SBA found that 150ineligible firms had represented themselves as being small for purposes offederal procurement.

"Most of these cases did not involve fraud, but instead were the result oferrors or misunderstandings of the size regulations," the SBA said in its June25 proposal. "To date, SBA is unaware of any firms being penalized … forfraudulently misrepresenting themselves as small business concerns. Therefore,SBA anticipates that the safe harbor provision of the proposed rule will impactvery few concern."

The 2010 Small Business Jobs Act sharplyincreased penalties for companies that try to defraudthe government by seeking to win contracts set aside for small businesses.Under the new regime, when a company wins a contract by willfullymisrepresenting its small business status, the government's presumed loss isthe value of the contract.

Although the law already provided for criminal and civil penalties, includingFalse Claims Act liability, the government had a hard time winning such becauseit was difficult for the government to establish damages when the contract wascompleted by an ineligible company. A 1994 case in the Court of Federal Claims,Ab-Tech Construction v. United States, limited the government's recoverabledamages because the contractor had provided the agreed on services, and othercases followed that precedent.

The new regulations, which took effect in August 2013, will allow prosecutorsand private relators to pursue fraud much more easily, under the assumptionthat contracts obtained through misrepresentation have no value to thegovernment. This puts the entire value of the contract at stake in litigation.

To view full article, click here: http://www.law360.com/articles/568462/small-biz-group-slams-proposed-contract-fraud-safe-harbor