Construction contractors and material suppliers who sell services or materials to disadvantaged business enterprises for federal or state construction projects need to pay close attention to ensure they do not get caught in the middle of a business enterprise fraud case.
The federal government and many state and local governments have developed programs to provide opportunities for minority-owned and woman-owned businesses (commonly called DBEs, short for disadvantaged business enterprises) to obtain government contracts, especially in the construction industry. Under these programs, government contracting agencies are required to establish a percentage of the work on each construction project to be performed by DBEs.
These DBE programs are intended to increase the participation of DBEs in industries in which they have been historically underrepresented. By establishing minimum participation requirements on such government construction projects, the government hopes to furnish socially and economically-disadvantaged persons with the opportunity to start their own businesses and to grow and prosper and eventually compete outside the DBE programs.
The public policy underlying these programs requires the actual participation by the DBEs in the construction projects, so the disadvantaged enterprises gain real hands-on experience in government contracting and can develop into independent, financially-strong government contractors.
In order to promote these important public policy goals, a body of laws, rules, and regulations has developed which require that DBEs actually perform a “commercially useful function” before their participation in a construction project can be applied to help satisfy these minimum DBE requirements for the job.
These laws, rules, and regulations are designed to ensure that the DBEs are actively involved in providing services and furnishing materials for the project, thus gaining the important experience that facilitates their future growth and development.
These laws, rules, and regulations do not permit a DBE to merely be an extra participant on a construction job through which funds are passed to create the superficial appearance of DBE participation. For their participation to be counted, they must perform a “commercially useful function” and not act as a mere “pass through.”
To minimize the improper use of DBE programs, U.S. Attorneys over the last few years are increasingly bringing civil and criminal claims under federal mail or wire fraud statutes or under the Federal False Claims Act against contractors and material suppliers and their executives and employees involved in DBE fraud involving “pass through” DBEs. These claims can result in large multi-million-dollar penalties and lengthy prison terms.
In addition, the Federal False Claims Act allows private citizens to act as whistleblowers and file DBE fraud suits on behalf of the government. In one recent such case, the project manager of a subcontractor was awarded more than $2 million for bringing a successful whistleblower DBE fraud suit relating to the job he managed for a subcontractor on the job. There are law firms out there actively soliciting such whistleblower claims, advertising on the internet and using aggressive pitches to potential whistle blowers.
To avoid such claims and to protect yourself, if you are selling services or materials to a DBE on a government project, make a detailed inquiry of the DBE, asking them focused questions to determine if the DBE is performing a commercially useful function and is not acting as a mere “pass through.” If in doubt, contact our law firm for guidance in avoiding the potentially severe penalties that can arise if you find yourself in the middle of a DBE fraud.
KMK is again providing judges and lawyers important scholarship to guide pretrial litigation discovery, though the State Bar of Wisconsin. Continuing their decades of work, Robert Gegios and Melinda Bialzik are authoring another edition of “Chapter 2 – Scope of Discovery” in Pinnacle Books’ Wisconsin Discovery Law and Practice. Robert and Melinda also authored, earlier this year, the latest version (of their many years of updates) of “Mitigation of Damages” as part of the State Bar’s Law of Damages. Additionally, Robert and Ryan Billings, along with Matt Stippich of Digital Intelligence (one of the nation’s most prominent electronic discovery services), are authoring another edition of “Chapter 7 – Electronic Discovery Law” in Pinnacle Books’ Wisconsin Discovery Law and Practice. All of these works have proven immensely popular in assisting litigation practices and judicial decisions in Wisconsin and elsewhere.
The Defend Trade Secrets Act of 2016 (DTSA) allows parties to file suit in federal court even if the requirements of federal diversity jurisdiction are not met. As a result, most claims of misappropriation of trade secrets can now be filed in federal court (not the case previously). The federal court system has different procedures, different substantive law, and a different pool of judges, and may be a better option for a company whose trade secrets have been exposed to competitors, although state court remains the superior forum in some cases (such as when injunctive relief is paramount).
When a theft of trade secrets occurs, it is critical to respond quickly to prevent the trade secret from being disseminated further. So, the DTSA provides a new procedure for seizing property (such as a smartphone or laptop) that could imminently be used for disseminating trade secrets. Skillful use of this provision can help a company prevent additional exposure, and there is no comparable provision for seizure of this kind in Wisconsin state law.
Companies also need to know that the DTSA contains an unusual provision that can act as a trap for employers in enforcing restrictive covenants. The law provides protections for whistle-blowers who disclose trade secrets in the course of reporting violations of law to government officials, and requires employers to provide notice of this protection to employees who sign or update non-disclosure contracts, or other documents governing trade secrets, after the effective date of DTSA. An employer forfeits the ability to collect punitive damages or recover attorneys’ fees in action against employees who were not provided this notice. Employers should take heed of this requirement for all new and updated restrictive covenants that address trade secrets.
Any business considering a lawsuit to remedy misappropriation of trade secrets should discuss with experienced counsel the advantages and disadvantages of filing in state or federal court. Because of the DTSA, the victim of trade secret theft now has been both federal and state options for presenting its claims. Also, businesses may wish the advice of counsel for drafting (or redrafting) restrictive covenants in their employment contracts, to ensure that they pass muster under the new law.
If you have questions about pursuing a claim for theft of trade secrets, or updating non-disclosure agreements or other restrictive covenants to provide required notices, contact KMK Attorney Ryan M. Billings at email@example.com.