Court ruling puts ethics on the front burner

Infotech and the law | Legal insights for today's market

A recent court decision highlights the risks that a government
contractor faces when the government believes that the
company has made false statements in proposals, or other
documents, that it has submitted to the government.
When combined with heightened public attention to incidents of contractor
misconduct, cases such as this one emphasize the need for management
to 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 though
the contractor fully and satisfactorily performed
on certain contracts in question, the
government got no value. As a result, the
contractor had to repay to the government
three times the total revenue received under
the contracts.

The case involved a contractor that had
embellished its experience and capabilities
in its proposals for four contracts that it
received under the federal government's
Small Business Innovative Research (SBIR)
program. The court found that the contractor
did so with a reckless disregard for the
truth of its statements, if not actual knowledge
that they were false.

Once the contractor's statements in its
proposals were proven false, the issue
became the extent of damages. The Civil
False Claims Act prescribes a penalty of
triple the amount of damage to the government,
and a forfeiture of between $5,500
and $11,000 per false claim.

The contractor argued that the government
experienced no damages because the
contractor developed a valuable rechargeable
battery technology and satisfactorily
performed the contracts. It argued that the
government, therefore, had received what it
had bargained for; namely, satisfactory performance,
technology development and
license rights to the technology.

The court disagreed, ruling that the government
did not receive the benefit of its
bargain. First, the court reasoned that the
contracts were for research and development,
so the government never received
anything of tangible value. In the court's
words, the government did not receive any
so-called widgets under the contracts. The
court considered it inconsequential that the
government received standard license rights
to the developed technology. Importantly,
the contracts were awarded pursuant to the
SBIR program. Regardless of whether the
contractor was a small business, the court
considered the company ineligible for SBIR
contracts because it misled the government.

The reasoning, in summary, was that no
widgets were produced and the money
should have gone to support other companies
under the SBIR program.

Thus, the court calculated the government's
damages as the total revenue paid
under the contracts times three, or about
$5 million. The court also ruled that
each contract should be considered a
causative act, leading to four forfeitures
and an additional $43,000 in penalties.

The Lithium Power case stands out
from most other situations in several
ways. Not only was the underlying misconduct
egregious, but the contracts
were for research and development
under the SBIR program. Most contracts
convey more tangible value to the government
than do research and development
contracts, which ordinarily have as their
goal the acquisition of valuable rights for
the government, not solely the promotion
of small-business contracting.

Although Lithium Power may be distinguishable
from most situations, its calculation
of damages ? three times all revenue
received under the contract and forfeitures
? is a stark reminder of the need to ensure
that all elements of a company are operating
with integrity and knowledge of the
unique rules of doing business with the federal

John Jensen ( is a
partner in the Government Contracts practice at
Pillsbury Winthrop Shaw Pittman LLP.

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