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March 25, 2014

Minority-Contracting Compliance — Three Risks

Summary:

Contractors that fail to comply face fines, expensive lawsuits and lost projects -- and executives and employees can even wind up in jail.

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On Jan. 13, 2014, the Department of Justice announced that two former executives of Schuylkill Products had been sentenced to two years in federal prison and forced to pay $119 million in restitution because of their role in what the FBI called the largest fraud involving the Department of Transportation’s Disadvantaged Business Enterprise (DBE) Program. A third individual, the owner of Marikina Construction, the firm that was used as a “front” in the scheme, received a prison sentence of nearly three years.

The sentencing of these individuals is not the result of an isolated incident. In recent years, federal prosecutors and the DOT inspector general have significantly stepped up enforcement of DBE and have brought several cases resulting in civil penalties and jail time. Some involved well-known international construction firms and their executives.

Here are three reasons why every contractor dealing with a federal, state or local minority contracting program needs to have proper compliance policies and procedures in place:

1.         Jail Time and Civil Fines

Contractors that do not comply with the DBE program’s rules and regulations face the very real threat of jail time and civil fines. According to the DOT, DBE fraud now represents more than one-third of the DOT inspector general’s open cases. From Oct. 1, 2003, through Sept. 30, 2008, investigations of DBE fraud allegations resulted in 49 indictments, 43 convictions, nearly $42 million in recoveries and fines and 419 months of jail sentences. From 2009 to 2010, the number of open investigations related to DBE fraud increased by almost 70%. The number of investigations shows no signs of slowing, as the DOT is aggressively hiring additional investigative agents.

Under several legal doctrines, a defendant can be held liable when the evidence shows that the defendant intentionally avoided confirming certain facts and learning the truth.

2.         Whistleblower Lawsuits

Under the Federal False Claims Act, every disgruntled employee is a bounty hunter. The act authorizes private individuals to bring a civil claim in the name of the U.S. against anyone who fraudulently obtained money or property from the government. The person who brings the action is entitled to 30% of the amount recovered for the government.

Contractors can become the target of a False Claims Act case if they submit payment applications to the government that falsely certify that a certain percentage of work was performed by DBE firms. Like in the criminal context, a contractor can still be liable even if it lacks actual knowledge of the DBE fraud. Reckless disregard for the truth or deliberate ignorance are sufficient.

3.         Bid Rejections and Challenges

Strict minority set asides or quotas are almost always unconstitutional. Disadvantaged business contracting programs, like the DOT’s DBE, are not quotas (a fact that DOT underlines in its regulations). Rather, they are goals that contractors must use “good-faith efforts” to achieve. In fact, many contractors would be surprised to know that a state transportation agency cannot reject a bid because it fails to include a commitment to subcontract work that meets or exceeds the stated DBE goal. However, for a bid to be accepted, the contractor must be able to demonstrate “good faith efforts” to meet the stated DBE contracting goal. Because most state procurement codes require the award of a contract to the lowest responsible and responsive bidder, failing to document adequate good-faith efforts is grounds for a state transportation agency to reject a bid or for challenge to be filed by a disgruntled bidder.

The risks that contractors face with not complying with minority contracting programs, particularly the DOT DBE program, literally cannot be ignored. At best, contractors that fail to comply with the program face significant financial ramifications in the form of fines, expensive lawsuits and lost projects. At worst, executives and employees can wind up in jail.

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About the Author

Wally is one of Super Lawyer Magazine’s “rising stars” of construction litigation. He has successfully litigated hundreds of construction-related cases, some that resulted in published court opinions and changes in substantive law. Since graduating from law school in 2002, Wally has dedicated his legal career to representing individuals and companies in the construction industry.

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