8(a) Graduate Gets Demerit: Eleventh Circuit Holds 8(a) Program Graduate Subject to FCA Liability Following Change in Control

Earlier this summer, the Eleventh Circuit held that graduates of the Minority Small Business and Capital Ownership Development Program (commonly known as the 8(a) program) — i.e., companies that have grown too large for the program — are nonetheless subject to certain program requirements as long as they continue to perform existing contracts, and that violation of those requirements can lead to False Claims Act (FCA) liability under a fraudulent inducement theory. In Gose v. Native Am. Servs. Corp., 109 F.4th 1297, the court reversed the district court’s grant of defendants’ motion to dismiss, holding that the relators sufficiently alleged defendants were “participants” in the program and their failure to report a change in ownership/control rendered bids for new work under existing contracts fraudulent.

Relators were former owners of DWG & Associates, Inc. (DWG), a small business that participated in and received several contract awards under the 8(a) program. DWG grew and eventually “graduated” from the program, though it was permitted under SBA regulations to continue bidding for task orders on its existing 8(a) contracts. Relators allege that when DWG encountered financial problems, defendants Native American Service Corp. (NASC) and Great American Insurance Company (GASC) — neither of which was an 8(a)-eligible business — took control of DWG. Relators allege that although DWG graduated from the 8(a) program, it remained a “participant” and was required to notify the SBA of the change in ownership and seek a waiver in order to be eligible for new work under its existing contracts. Because DWG did not do so, relators allege that claims it submitted for work obtained after the change in ownership violated the FCA under a fraudulent inducement theory.

Defendants argued, and the district court agreed, that DWG was not a “participant” in the 8(a) program because it had graduated. The district court reasoned that because the 8(a) program requires only “participants” to seek waivers, defendants were not required to do so here. The district court further held that relators are still owners of DWG, and so there had been no change in ownership necessitating notifying the SBA and seeking a waiver. Lastly, the district court questioned whether fraudulent inducement is a valid FCA theory in the absence of a claim that is facially false.

The Eleventh Circuit reversed. It first held that the term “participant” “includes both nongraduated and graduated concerns” and therefore the 8(a) rules on control and ownership — including the requirement to notify SBA of a change — still applied to DWG while it performed work on existing 8(a) contracts. The court also held relators adequately pled that there was, in fact, a change in ownership that required notification, reasoning that regardless of whether relators retained an ownership stake in DWG, there were sufficient allegations that NASC and GASC had taken control of the company. Thus, DWG was required to provide notice to the SBA and seek a waiver to continue to bid on jobs under its existing 8(a) contracts.

Finally, the Eleventh Circuit reaffirmed that fraudulent inducement is a valid liability theory under the FCA. The court concluded, consistent with decisions from the Supreme Court and other courts of appeals, that claims submitted for fraudulently obtained contracts — regardless of whether the claims submitted thereunder accurately account for the work performed — are actionable under the FCA. The court further reasoned that relators satisfied Rule 9(b)’s particularity requirement by pleading sufficient facts to put defendants on notice regarding the alleged fraudulently induced job bids. The court concluded there was no need to allege facts about the submission of specific claims because the alleged fraud was in connection with submission of the bids, not the claims.

The Eleventh Circuit’s expansive interpretation of “participant” under the 8(a) program — and the threat of the FCA’s treble damages hammer — underscores the need for graduated concerns to remain vigilant regarding compliance with program requirements. We will continue to monitor this case as it returns to the district court. You can always find updates on this and other important FCA developments from Arnold & Porter here at Qui Notes.

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