Terry Gerton You are following a couple of storylines that we touch here every once in a while. In the last few weeks, we’ve seen DOJ announce major false claims act settlements involving federal set-aside programs. And at the same time, SBA has announced changes to the administration of the 8(a) program. When you look at those two storylines separately, how do you connect the dots? What is happening in the 8(a) community?

William Hart Well, I think the biggest thing is that the administration has clearly targeted the 8(a) program as part of a broader push against diversity, equity, and inclusion programs. And a number of cabinet members have made statements saying that the program is ripe for abuse and believe that it is rife with fraud. And this could be individuals or entities posing fraudulently as qualifying for the set-aside program. Or it could be individuals and entities serving as mere conduits and pass-throughs for larger, ineligible contractors. So I think what’s going on here is every part of the government is coordinating with the Justice Department in order to target, identify, and ultimately investigate and potentially prosecute fraud among its 8(a) contractors.

Terry Gerton Well, let’s go back to those False Claim Act cases, then. What were the underlying behaviors that got these contractors into trouble?

William Hart So in the most recent cases, it seems as though they’ve started with the Service Disabled Veteran-Owned Small Business programs. And there were two recent settlements, one out of the Middle District of Florida and the other out of the Northern District of New York, in which the local U.S. Attorney’s offices partnered with the relevant Office of Inspector Generals to focus on fraud with respect to those two individual companies. And what got the companies into trouble is that the so-called 8(a) contractor was really just a pass-through or a conduit, meaning they weren’t actually doing the work, nor were they actually in control. And so with that being so blatant and out in the open, it made it a pretty easy win for the government in both cases, and as a result, both resulted in settlements.

Terry Gerton That issue of control seems to be coming up more and more. How does the government determine whether a small business is actually controlling the work or just serving as the pass through for someone else? What do they look for?

William Hart They’re looking for actual operational management capacity, so they’re looking for, is the small business 8(a) eligible entity actually making managerial decisions? Are they actually doing work and billing to the contract? Or are they merely just simply forwarding emails along, for example, to a broader entity behind the scenes that would not actually be eligible for the 8(a) contract in the first place? But they’re looking for, what is the lived reality on the ground, not what the corporate structure might otherwise suggest.

Terry Gerton And are these cases coming up because the government is doing 100% review of the files or are there whistleblowers, or how do these cases come to the attention of the Department of Justice?

William Hart So it can happen in a number of different contexts. As you, your listeners, almost certainly know, the False Claims Act has a Qui Tam provision. No one actually knows how to pronounce the Latin phrase, but I go with Qui Tam. You can ask 100 different FCA practitioners, you might get 100 different responses. But that is one of them. And obviously there are strong financial incentives for so-called relators to bring these cases if they’re successfully adopted and taken on by the government. So that’s one way in which it could come up, and that’s how it came up in the Northern District of New York. Separate and apart from it is something we should probably spend a little bit of time on, which are audits that are being conducted at the agency level of their 8(a) contractors and their 8(a) programs. And I think that’s what we’re going to see more and more of. So last June, Administrator Kelly Loeffler had a big splashy announcement that they were going to do a wholesale audit of the SBA 8(a) program in an effort to root out what they viewed as pass-through fraud. That is, 8(a) contractors merely acting as straw men or straw contractors for larger contractors. And so, as a result, we’ve already seen a little bit of movement in that. We have seen, as the SBA has announced earlier this year, that they are decertifying certain entities that didn’t comply with parts of the audit. And independent of that, Secretary of War Peter Hegseth has announced a Department of War audit of 8(a) contractors. And again, has alleged in the press clippings that the program is rife with fraud and that taxpayer money is being wasted and not steered toward small businesses but rather large defense contractors. So again, we’re talking about a year or so timeline. I think it’s not inconceivable that these audits will start to bear fruit in the form of prosecutions or investigations by the department.

Terry Gerton Will Hart is of counsel with Rogers Joseph O’Donnell. So Will, you’re talking here about a pretty significant step up in enforcement activities by the federal government. At the same time, has there been sort of an increasing risk behavior on the part of small business contractors? Are they setting themselves up to be caught in these audits?

William Hart Well, potentially. I think for a long period of time, only the most egregious cases were prosecuted or, at the very least, civilly investigated and then ultimately settled. And it takes a lot of investment to actually prove that an 8(a) was just a pass-through or a straw man in the contractual arrangement. So with the lack of actual resources devoted to these cases, perhaps some complacency did set in. You know, and your listeners almost certainly know, it is not out of the norm for large contractors to work with 8(a)s to get access to sole source contracts and other set asides. As long as the arrangements comply with the regulations, that is totally permissible. But as we’ve kind of been talking about, it’s a sliding scale, and we look at the facts on the ground as they in terms of who has control in the arrangement. And so I think it’s easy for these arrangements to be set up with the best of intentions, but unfortunately it begins to fall to the point where the larger subcontractors is exercising more control than was originally contemplated.

Terry Gerton As we’re looking at this period of increased enforcement and examination by the federal government, if you were advising an 8(a) firm now and they were checking to see whether they might be vulnerable, what would you want them to start looking at?

William Hart Well, first we would look at corporate structure and how the, what entity is actually doing the contracting itself. Second, we would at the relationship with our subcontractor and what’s spelled out in either the teaming agreement or the subcontract. Third, we want to look at the division of labor and how labor is parceled out between the contractor, i.e. the 8(a) entity and the sub-contractor. And then we would wanna look into the financial arrangements in terms of how much each side is getting out of the federal contract itself. So we would start with those four principles to ensure that both contractor and the subcontractor were in compliance.

Terry Gerton It seems like the risk here is predominantly on the 8(a) firm, but are there risks that might accrue to their larger subcontracting partner as the audit manifests?

William Hart Absolutely, and you anticipated the very next thing I was going to say, which is there are any number of theories of liability that could have the larger subcontractor that’s not ADA eligible wind up in legal hot water. The first is that they would have aided and abetted the subcontractor, or, sorry, the contractor in obtaining the sole source or set aside under false pretenses. You could also make out a case that they conspired with the 8(a) contractor to obtain something that they were not legally entitled to obtain in the form of a sole source contract or they willfully caused the submission of false claims by the 8(a) contractor. So federal prosecutors and DOJ trial attorneys within the civil fraud division have no shortage of legal theories on which to go after the larger subcontractors behind the 8(a)s.

Terry Gerton So how does this all play out? A year or two years from now, are we gonna have a lot fewer 8(a) firms in the market, or is everyone gonna be in compliance with the new rules and it’ll be fine? Where do you see it headed?

William Hart I think it’s conceivable to have two things. The first is, I think, as has already happened with the SBA, some of these entities are being decertified as 8(a) eligible after choosing not to comply or failing the SBI audit. So that’s something that I think could continue to happen as each agency is going through its roles of 8(a) contractors. The second thing is that government can make an example out of one of the more egregious offenders, whether it’s the larger subcontractor or the ADA contractor itself, a large significant case with a high dollar value attached to it, followed by a lot of press attention and press releases, and potentially a large settlement or, if the facts warranted, a criminal prosecution, they can actually prove intent and willfulness. But I do see an effort to have a large prosecution or a large civil settlement to act as a deterrent in the market.