August 2014

SBA Proposed Rule Provides Safe Harbor to Size Misrepresentation

4 min

This article was also published in Law360 on August 7, 2014.

The Small Business Administration's (SBA) recent proposal to implement a limitation on liability for contractors relying on Small Business Development Centers (SBDC) and Procurement Technical Assistance Centers (PTAC) could provide a significant safe harbor to small business misrepresentation fraud for businesses that are eligible to receive these advisory opinions.

Issued June 25, 2014, the SBA's proposed new rule establishes a safe harbor for contractors found liable of fraud penalties for misrepresenting their size status if those contractors "acted in good faith reliance upon small business status opinions received from Small Business Development Centers (SBDCs) or Procurement Technical Assistance Centers (PTACs)." The SBA's proposed rule implements section 1681 of the National Defense Authorization Act of 2013, which amended the offenses and penalties section of the Small Business Act. Once a contractor obtains a written advisory opinion, the proposed rule would provide a bright-line safe harbor for contractors relying on such an opinion. The SBA proposed to develop "the criteria small business status advisory opinions must meet in order to be deemed adequate and specify the review process for such opinions." The SBA proposed to include this limitation of liability for misrepresentation of size status in section 121.108(e)(4) to Title 13.

Although the SBA stated that it anticipated that "very few concerns will be affected by the small business status advisory opinion provision," it is unclear how the safe harbor could affect a small business False Claims Act allegation. In addition to establishing the penalties for a contractor misrepresenting its size or status to the government, § 121.108 discusses the government's claims for False Claims Act damages against a contractor that misrepresents its size or status. The current § 121.108 imposes onerous liability on contractors who "willfully" misrepresent their size or socioeconomic status in the submission of a bid, proposal, or application that is set aside for or that encourages the Agency to classify the award as to a small business concern, or the misrepresentation of the concern's size or status on the System for Award Management (SAM). If a contractor is found to have misrepresented their size or status in one of these ways, § 121.108(a) provides a "presumption of loss" to the government of the entire value of the contract. Thus, a small business contractor that misrepresents its size could be hit not just with penalties from the SBA, but False Claims Act liability as well.

Despite the fact that both the penalties and the False Claims Act liability provisions under § 121.108 could be predicated on the same misrepresentation of fact, the SBA's proposed regulation would provide a separate – and different – limitation of liability for each provision. With regard to the False Claims Act, the regulations at § 121.108(d) provide a "Limitation of Liability" for a contractor's misrepresentation of size or status "in the case of unintentional errors, technical malfunctions, and other similar situations that demonstrate that a misrepresentation of size was not affirmative, intentional, willful, or actionable under the False Claims Act." By comparison, the new proposed rule creates an additional "Limitation of Liability" for the "Penalties for Misrepresentation" for concerns relying on a "small business status advisory opinion." Absent meaningful clarification in the final rule, there is a risk that under the proposed rule, a contractor that misrepresents its size or status because it relied upon a small business status advisory would be safe from SBA penalties, but would still have to expend the legal fees to defend against a False Claims Act allegation from a qui tam complainant or the Department of Justice. Although reliance upon a "small business status advisory opinion" can be inferred to be an "unintentional error," the proposed rule should be amended to provide an important, clearer safe harbor from small business fraud liability for those eligible to receive such an opinion. The safe harbor would create greater assurance that a contractor's interpretation that it is small for a particular solicitation and NAICS code is reasonable within the industry and could be used as a cost-effective method of quashing future actions that would later challenge the contractor's interpretation.

Comments on the rule are due August 25, 2014, after which a final rule will implement the regulation. The SBA will hopefully opine on the important interplay between a safe harbor for penalties and one that defeats the knowledge standard of the False Claims Act. In the interim, a contractor following this rule should consider the following actions:

  • Watch for clarification on what the procedure will be to obtain an advisory opinion.
  • Locate the nearest SBDC or PTAC that the contractor may consider partnering with to obtain an advisory opinion, if eligible for such an opinion.
  • As always, ensure all SAM certifications are appropriately up-to-date.
Please contact one of the authors or a member of Venable's Government Contracts Practice Group if you have any questions about the proposed rule.