Lessons from cases involving "small business" and "Buy American" claims

It should go without saying that contractors should do their best to avoid lying to the government in the bidding and performance of federal contracts. The government has a host of remedies available to ensure contractors who are caught misrepresenting information face serious and severe penalties. The False Claims Act, 31 U.S.C. §§ 3729 – 3733, alone allows the government to triple its monetary damages, as well as assess fines that range from $13,508 to $27,018.[1] Moreover, company executives who knowingly violate the act may face criminal charges.

Two recent cases highlight the potential penalties companies may face when the government believes a contractor made fraudulent representations in order to receive and retain lucrative federal contracts.

Civil Fraud

On December 7, 2023, the Department of Justice announced it reached a $1.75 million settlement with Pavion Company (Pavion) to settle civil fraud allegations that Pavion and its subsidiaries misrepresented their size status in order to receive contracts set aside for small businesses. Pavion's predecessor company was acquired in 2016. The United States alleged the acquisition resulted in Pavion no longer qualifying as a small business. Despite this, the government argued, Pavion and two of its subsidiaries continued to falsely certify that they met the small business size requirements in order to obtain 117 small business contracts from 20 different federal agencies. In August 2023, Pavion self-disclosed the issue, maintaining the small business certifications were discovered as part of internal integration and consolidation activities. The company further provided a summary of corrective actions it had taken to avoid future misrepresentations of size. The Department of Justice highlighted that Pavion cooperated fully in the following investigation.

Given the length of time the alleged misrepresentations occurred and the number of contracts at issue, Pavion's self-disclosure, voluntary corrective action, and cooperation during the investigation likely led to the relatively low settlement amount.

Criminal Fraud

Also on December 7, 2023, the chief executive officer, James Cai, of a New Jersey contractor pleaded guilty and admitted to falsifying information related to forklifts provided to the U.S. Army. The company, Toner Connect LLC, contracted with the Army to provide forklifts to various Army installations. The contracts required the forklifts comply with the Buy American Act, which required the forklifts to be manufactured in the United States and at least 50 percent of the cost of components must be made or produced in the United States.

In order to reduce costs, Toner Connect purchased two forklifts from a company in Shanghai, China. The company then installed data plates on the forklifts that represented the forklifts were manufactured in New Jersey. The Army discovered the forklifts were fraudulent when operational issues occurred and the forklifts could not be properly repaired.

Cai plead guilty to a charge of making false statements to the government in connection to the forklift contract. His sentencing is scheduled for April 11, 2024. He is facing a maximum penalty of five years in prison and a maximum fine of $250,000.

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