The False Claims Act (FCA) continues to be one of the federal government’s primary enforcement tools against government contractors. To keep you informed on the status of the law, Bradley’s Government Enforcement and Investigations Practice Group is pleased to present the False Claims Act: 2019 Year in Review, our eighth annual review of significant FCA cases, developments and trends.
Trust but Verify: Disclosure of Trust Ownership May Be Required for Family-Owned Government Contractors
Family-owned businesses are often owned and controlled by family trusts. Trusts are used by families for estate planning, tax planning and asset protection. Family-owned government contractors with trust ownership structures should be mindful of ownership disclosures required by the Federal Acquisition Regulation (FAR). Failure to comply with the required disclosures could result in False Claims Act or false statement allegations, loss of Facility Security Clearances, rejections of bids and proposals, and loss of bid protests.
Under rules adopted in 2014, a government contractor or offeror owned by another entity must disclose its own Commercial and Government Entity (CAGE) code and the CAGE codes of its “immediate owner” and “highest level owner” both in the System for Award Management (SAM) and to the contracting officer before contract award. Under FAR 52.204-17 (Ownership or Control of Offeror), “immediate owners” and “highest-level owners” are required to obtain their own CAGE codes even if they will not be directly contracting with the government. The terms “immediate owner” and “highest-level owner” are defined in FAR 52.204-17:
“Immediate owner” means an entity, other than the offeror, that has direct control of the offeror.
“Highest-level owner” means the entity that owns or controls the immediate owner of the offeror, or that owns or controls one or more entities that control an immediate owner of the offeror. No entity owns or exercises control of the highest-level owner.
If an offeror is owned directly by individuals, the offeror does not have an “immediate owner” or a “highest-level owner.” If an offeror is directly owned by another entity, the ownership entity is the “immediate owner” of the offeror. If an offeror’s immediate owner is, in turn, owned by another entity or series of entities, the last entity at the top of the offeror’s organizational chart is the “highest-level owner.” An offeror is required to certify its ownership disclosures in the “Representations and Certifications” section of its registration on SAM.gov.
The term “entity” is not defined in the FAR. The government website where an offeror obtains CAGE codes for its “immediate owner” and “highest-level owner” asks what type of entity is being registered and offers only two options: “U.S. Commercial Company/Firm, Organization or Governmental Entity (non-federal)” or “sole proprietorship.” Given that the term “entity” is not defined in the FAR and the registration website does not expressly refer to trusts, offerors registering on SAM.gov may think disclosure of a family trust as the offeror’s “immediate owner” or “highest-level owner” is unnecessary.
However, both the state law characteristics of a trust and recent guidance from the Defense Logistics Agency (DLA), the agency responsible for assigning CAGE codes, suggest that trusts are considered entities under the FAR and should have their own CAGE codes and be disclosed on SAM.gov.
Trusts are created under state law. While trusts are typically not required to be registered with the secretary of state or other applicable agency in their state of formation, trusts are commonly referenced in state business entity statutes. Trusts also have certain characteristics that are similar to other business entities such as corporations and limited liability companies. Namely, trusts can buy, sell and own personal property and real property; own equity in other business entities; and enter into contracts. Trusts may also shield their beneficiaries from the claims of creditors.
In addition, the CAGE Code Registration Procedures published by the DLA in 2019 suggest that the DLA considers trusts to be entities. The DLA notes that in order for a CAGE code to be assigned, the DLA’s U.S. Cage Program Office must validate the legal business name of the entity obtaining a CAGE code. The CAGE Registration Procedures state that the DLA will validate the legal business name of a trust by obtaining and reviewing a copy of the trust agreement for the trust. The DLA’s guidance indicates that trusts would be considered entities under the FAR and should have their own CAGE codes.
In order to avoid possible False Claims Act or false statement allegations, loss of security clearances, rejections of bids and proposals, and adverse bid protest decisions, family-owned government contractors with trust ownership structures should review their SAM.gov registration to ensure that disclosures about their “immediate owner” and “highest-level owner” are accurate.
If you have any questions about the topics discussed in this article, please feel free to contact Frederic Smith or Aron Beezley.
*Frederic Smith is a partner in the firm’s Corporate and Securities Practice Group and is the head of the firm’s Family Business team. Aron Beezley is a partner in the firm’s Washington, D.C., office and is co-leader of the firm’s Government Contracts Practice Group.
No. 2 of the Top 10 Horrible, Terrible, No Good Mistakes Lawyers Make in Mediations
This post is a continuation of the 10 most horrible, terrible, no good, “bang your head against the door” mistakes that I have seen lawyers make before, during and after mediations in which I was the mediator. As stated in previous posts, it takes more than throwing together a mediation statement at the last second and showing up at the mediation. Doing it right requires the same kind of due diligence and work that goes into preparing for a key deposition or even trial. Great “mediation” lawyering is essential and is the best way to get to an acceptable deal.
Number 2: Don’t Make a Failed Mediation a Failure
As much as the mediator, counsel, and the parties might like, the fact is that not all disputes submitted to mediation get to a complete “global” settlement. However, if your mediation “fails,” don’t throw your documents into your briefcase and complain that the other side wasted your time and did not come in “good faith.” Stop. Think. Evaluate carefully what you learned and may have agreed upon.
You and your client have just spent an entire day reviewing and discussing the pros and cons of your case and the positions of the other side, and all the while – hopefully (see post No. 4) – listening to what the mediator has to say. Even in a “failed” mediation, you leave with additional knowledge about your case and the other side’s case as well, Now, consider what else may have been accomplished. Are there are any non-global agreements that can be reached that will possibly lead to a better chance at a later settlement and/or save legal fees? Use the mediator to raise these issues. Can there be discovery (formal or informal) on the key issues that led to a non-global deal? Can there be a partial settlement of some of the disputed issues? How many depositions are really needed? What about shifting the case from litigation to binding arbitration? If a major factor is a pending summary judgment motion, perhaps schedule another mediation.
The point is: set aside any disappointment about not getting a global deal done and put on your litigator thinking hat before you walk out the mediation door. You may very well have accomplished much more than you realize.