Court ruling puts ethics on the front burner

A recent court decision highlights the risks that a governmentcontractor faces when the government believes that thecompany has made false statements in proposals, or otherdocuments, that it has submitted to the government.When combined with heightened public attention to incidents of contractormisconduct, cases such as this one emphasize the need for managementto focus on all matters relating to ethics and business conduct.In the case last month of U.S. ex rel.Longhi v. Lithium Power Technologies Inc.,the government proved that, even thoughthe contractor fully and satisfactorily performedon certain contracts in question, thegovernment got no value. As a result, thecontractor had to repay to the governmentthree times the total revenue received underthe contracts.The case involved a contractor that hadembellished its experience and capabilitiesin its proposals for four contracts that itreceived under the federal government'sSmall Business Innovative Research (SBIR)program. The court found that the contractordid so with a reckless disregard for thetruth of its statements, if not actual knowledgethat they were false.Once the contractor's statements in itsproposals were proven false, the issuebecame the extent of damages. The CivilFalse Claims Act prescribes a penalty oftriple the amount of damage to the government,and a forfeiture of between $5,500and $11,000 per false claim.The contractor argued that the governmentexperienced no damages because thecontractor developed a valuable rechargeablebattery technology and satisfactorilyperformed the contracts. It argued that thegovernment, therefore, had received what ithad bargained for; namely, satisfactory performance,technology development andlicense rights to the technology.The court disagreed, ruling that the governmentdid not receive the benefit of itsbargain. First, the court reasoned that thecontracts were for research and development,so the government never receivedanything of tangible value. In the court'swords, the government did not receive anyso-called widgets under the contracts. Thecourt considered it inconsequential that thegovernment received standard license rightsto the developed technology. Importantly,the contracts were awarded pursuant to theSBIR program. Regardless of whether thecontractor was a small business, the courtconsidered the company ineligible for SBIRcontracts because it misled the government.The reasoning, in summary, was that nowidgets were produced and the moneyshould have gone to support other companiesunder the SBIR program.Thus, the court calculated the government'sdamages as the total revenue paidunder the contracts times three, or about$5 million. The court also ruled thateach contract should be considered acausative act, leading to four forfeituresand an additional $43,000 in penalties.The Lithium Power case stands outfrom most other situations in severalways. Not only was the underlying misconductegregious, but the contractswere for research and developmentunder the SBIR program. Most contractsconvey more tangible value to the governmentthan do research and developmentcontracts, which ordinarily have as theirgoal the acquisition of valuable rights forthe government, not solely the promotionof small-business contracting.Although Lithium Power may be distinguishablefrom most situations, its calculationof damages ? three times all revenuereceived under the contract and forfeitures? is a stark reminder of the need to ensurethat all elements of a company are operatingwith integrity and knowledge of theunique rules of doing business with the federalgovernment.