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Court Upholds $5 Million Judgment against Small Business Grantee

Date Published
Jul 17, 2009

The United States Court of Appeals for the Fifth Circuit recently issued a decision that clarifies application of the False Claims Act to government grants.  At issue in United States ex rel. Longhi v. Lithium Power Technologies were a series of grants that the Department of Defense (“DoD”) gave to Lithium Power Technologies (“Lithium”) for the development of very thin, rechargeable batteries.  The grants were made under a program known as the Small Business Innovation Research (“SBIR”) program, pursuant to which various government agencies (including DoD) made grants to small business to support research and development efforts.  DoD chose grantees based upon applications in which the applicants were required to describe their experience, facilities, key personnel and other characteristics relevant to whether they would be able to benefit from a grant.  The qui tam relator – later joined by the Government – alleged that Lithium made various misrepresentations in its SBIR applications that collectively gave the impression that the company was more established and had greater experience and qualifications than it actually had.  As a result of those applications, DoD made $1,657,455 in grants to the company.

Here’s where it gets interesting.  According to the court’s opinion, “the company then went on to successfully design and manufacture lithium-based batteries” that DoD “found to be satisfactory.”  To put this into terms we can all understand:  Lithium lied in its resume, but actually turned out to be a really good employee.  So, Lithium argued to the court that even if it had made misrepresentations in its grant applications, the Government was not entitled to any damages because Lithium had done what it promised it would do with the grant money.

The court disagreed.  The court reasoned that the grants were not intended to provide a “tangible benefit” to the Government, and contrasted the grants with “standard procurement contracts” where the Government orders specific products or goods.  The purpose of the SBIR program, the court explained, was to enable small businesses to develop products to the point where “they could commercially market their products.”  The Government receives an “intangible benefit” from the SBIR program by providing grants to deserving applicants.  In other words, under the Government’s theory (which the court adopted) Lithium’s false statements “caused more than $1.6 million” of the Government’s money “to be siphoned off by a company with ‘dubious qualifications’” rather than going to “a better-qualified candidate.”

Under this theory, the court upheld the trial court’s finding that the Government suffered damages in the full amount of the $1,657,455 in grants.  And the court also upheld trebling of those damages, as is generally required under the False Claims Act.  Total bill to Lithium:  $4,972,365.

Needless to say, this a very pro-False Claims Act decision.  And given the billions in dollars of grants that the federal government awards each year, it could have wide-ranging impact.  All of the grantees who receive those dollars are now potentially on the hook to the Government for a full refund of the grants (and potentially for a refund of up to three times the amount of the grants) if they make false statements in their grant applications, and even if they do absolutely nothing wrong in connection with how they use the grants.

While that may seem off, there is actually a very good justification for the result.  Grant programs are competitions.  When an applicant for a grant “cheats” by lying on a grant application, there is a direct and measurable harm to all of the other applicants who did not cheat.  The basic integrity and fairness of the entire grant program is undermined, and justice requires that the cheater be punished in some way.  One way the Government can repair that damage to the fairness of the program is to take back the money from the cheater and – perhaps through the imposition of treble damages – deter future cheating.

To read the Fifth Circuit’s full opinion, click here.

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