Last month, the U.S. District Court for the Eastern District of Washington denied a motion to limit damages against a government contractor, United States ex rel. Savage v. Washington Closure Hanford LLC, where the government sought several categories of damages for alleged False Claims Act (FCA) violations.  With a case centered on a nuclear waste company falsely certifying compliance with small business plan participation requirements, the Court ruled that damages would not be limited to remedies provided in the contract.

Government Contractor Accused of Violating FCA by Misrepresenting Subcontractors’ Status

In 2005, the U.S. Department of Energy (DOE) awarded a 10-year, multibillion dollar, cost-plus-incentive-fee prime contract to Washington Closure Hanford (WCH) for environmental restoration, cleanup and closure of a portion DOE’s Hanford, Washington site. WCH negotiated and submitted a Small Business Subcontracting plan that required it to meet certain targets for subcontracting with small businesses, including women-owned small businesses.  In 2015, the plaintiff and the U.S. government filed suit alleging WCH knowingly misrepresented the status of several subcontractors in breach of the contract and the FCA.  They claimed WCH and other contractors reached an agreement amongst themselves to establish a façade of small, disadvantaged businesses to be used by WCH as subcontractors.

Government Contractor Requested and Was Denied Summary Judgment

WCH moved for partial summary judgment on the permissible scope of the government’s alleged damages and argued:

  1. Damages should be limited to remedies within the contract.
  2. If not, the Small Business Act’s presumption of loss did not apply.
  3. The value the government received from WCH, and its subcontractors, must offset the damages.

The Court denied WCH’s motion on all three arguments.

The contract sets forth the following two damages provisions:

  1. The contract incorporated FAR 52.219-16 which provides for liquidated damages for willful or international subcontracting plan violations. The clause entitles the government to liquidated damages if WCH “failed to meet its subcontracting goals… and failed to make a good faith effort to comply with its subcontracting plan.” Damages under this provision can only amount to the actual dollar amount that WCH failed to achieve under each subcontracting goal. The clause also states that “liquidated damages shall be in addition to any other remedies that the Government may have.”
  2. The contract also allowed the government to reduce WCH’s final fee amount, up to $3 million, for each failure to meet subcontracting plan goals with a $9 million cap.

WCH argued that damages should be limited to these two provisions within the contract. However, the Court sided with the government in ruling these contract provisions do not provide a remedy for knowingly misrepresenting the small business or disadvantaged business status of WCH’s subcontractors.  In addition, the Court ruled that damages cannot be offset with the work provided because the alleged harm derives from the loss of business and experience of small businesses, not whether the government received the services.

It is uncommon for FCA cases to focus so closely on compliance with subcontracting plans. Normally, issues with the subcontracting plans would be handled under the liquidated damages clause calling for a “good faith effort.” However, in this case, the Court found that the fraud allegations were beyond the scope of the contractual remedies, and permitted the government to proceed with its extra-contractual arguments.

If you have questions about this case or how you can prepare and implement a small business subcontracting plan, please contact me or another member of the Government Contracts practice at Bass, Berry & Sims. Check out Inside the FCA for more content and information related to the False Claims Act.