The SBA Issues Final “Presumed Loss” Rule: Safe Harbors Expanded (Part One)

June 2013 (No. 4)

Government Contracts

On June 28, 2013, the Small Business Administration ("SBA") issued a final rule to implement the statutory requirements of the Small Business Jobs Act of 2010. The Final Rule will be effective August 27, 2013.

While the presumed loss sanctions remain severe, to the relief of many in the industry, the final SBA rule softened and narrowed the liability scheme compared to the SBA's proposed rule issued in October 2011. The Final Rule clarifies that when a contractor or subcontractor willfully misrepresents its small business size status, there is a rebuttable presumption that a presumed loss to the government exists for every dollar expended on the contract. Certain acts are deemed willful certifications under the rule, including submission of a bid or proposal on any procurement set aside for small business, or registration on any federal electronic database such as SAM or ORCA for purposes of being considered for award as a small business concern. In addition to forfeiture of all contract payments, violations of the rule can subject contractors or subcontractors to severe penalties including suspension and debarment, civil penalties under the False Claims Act, and/or or criminal penalties under the Small Business Act.

The Final Rule relaxed the exposure potential by removing the term "irrefutable" from the presumption of loss, clarifying that contractors have an opportunity to present defenses in the face of a miscertification challenge. The Final Rule also takes the SBA out of the process for determining presumed loss liability, indicating that presumed loss claims will be determined in judicial or administrative actions by the Government against misrepresenting contractors. The SBA also relaxed exposure compared to the proposed rule by adding a catch-all "other situations" exception to the unintentional error or technical malfunction defenses. The Final Rule is replete with references to good faith errors as a defense to liability.

The Final Rule clarifies that the presumed loss will apply to subcontractors that misrepresent their status to receive subcontract awards, and to the relief of the prime contractor industry, the Final Rule protects prime contractors from liability if they rely on a written size representation by a small business subcontractor. As a practical matter, federal prime contractors would be well advised to obtain size and status certifications from their subcontractors, because in the absence of that certification, the door remains open to liability for prime contractors.

The Final Rule does not change the nuclear sanctions for size or status misrepresentations. We expect to see claims under the Small Business Jobs Act and the Final Rule added as Counts in False Claims Act cases, and in Board of Contract Appeals cases in Government claims or counterclaims. Federal prime contractors and subcontractors should take proactive measures to mitigate risk in this area. If you have any questions about the Final Rule or recommended measures to mitigate risk, please contact a member of Blank Rome LLP's Government Contracts Practice Group.

Notice: The purpose of this newsletter is to review the latest developments which are of interest to clients of Blank Rome LLP. The information contained herein is abridged from legislation, court decisions, and administrative rulings and should not be construed as legal advice or opinion, and is not a substitute for the advice of counsel.

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