United States ex rel. Bid Solve, Inc. v. CWS Mktg. Grp., Inc.

• Court: U.S. District Court — District of Columbia
• Writing for the Court: TREVOR N. McFADDEN, United States District Judge
• Citation: 678 F.Supp.3d 53
• Docket Number: Case No. 1:19-cv-1861-TNM
• Decision Date: 18 May 2023
• Parties: UNITED STATES EX REL. BID SOLVE, INC., Plaintiff/Relator, v. CWS MARKETING GROUP, INC., et al., Defendants.

678 F.Supp.3d 53

UNITED STATES EX REL. BID SOLVE, INC., Plaintiff/Relator, v. CWS MARKETING GROUP, INC., et al., Defendants.

Case No. 1:19-cv-1861-TNM

United States District Court, District of Columbia

Signed May 18, 2023

Jonathan K. Tycko, Tycko & Zavareei LLP, Washington, DC, Brianne E. Murphy, David Michael Jochnowitz, Washington, DC, Ryan Bradel, Ward & Berry PLLC, Tysons, VA, for Plaintiff/Relator.

Anthony J. Burba, Barnes & Thornburg LLP, Chicago, IL, Michelle Nicole Bradford, Barnes & Thornburg LLP, Washington, DC, for Defendants.

MEMORANDUM OPINION AND ORDER

TREVOR N. McFADDEN, United States District Judge

Two companies, Bid Solve and CWS Marketing Group, bid on a government contract reserved for small businesses. Bid Solve lost and cried foul. It claims that CWS understated its size and was not actually a small business. Bid Solve took its case to an agency and lost. Now it sues here under the False Claims Act, 31 U.S.C. § 3729. CWS and its owner move for summary judgment and Bid Solve moves for partial summary judgment. CWS made some misrepresentations, so the Court grants partial summary judgment to Bid Solve. But there remains a genuine issue of material fact as to whether CWS and its owners knew that those statements were false. So the Court denies their motion for summary judgment.

I.

CWS Marketing Group is a government contractor that helps agencies sell seized property. Bid Solve Resps. to Defs. Stat. of Mat. Facts (SUMF) ¶¶ 30, 33, ECF No. 53-1. To get those contracts, CWS bids on them. See, e.g., id. ¶ 43. Over the years, CWS has helped sell more than $1.5 billion in seized assets. Id. ¶ 31.

This case spawns from one disputed contract. Back in 2017, the IRS solicited bids for a contract to help it sell seized property. Id. ¶ 39. There was one important limit: only companies considered a "small business" could bid. Id. ¶ 41. And to be a small business, companies must have averaged under $7.5 million in annual "receipts" over the past three years. Id.; see also 13 C.F.R. § 121.104 (defining "receipts" and specifying a three-year average).

CWS submitted a bid for that contract, certifying that it had average annual receipts of $5.5 million. SUMF ¶¶ 43, 51. As part of its bid, CWS also certified that it was a small business. Id. ¶ 44. But CWS had competition. Another company, Bid Solve, also bid for the contract. Id. ¶ 71. And it too certified that it was a small business. Id. ¶ 73. Ultimately, the IRS awarded CWS the contract. Id. ¶ 79.

But Bid Solve was not finished. Just one day later, it challenged CWS's bid with the Small Business Administration. Id. ¶ 80. There, it claimed that CWS was not a small business because it had average annual receipts over $7.5 million. Id. ¶ 81. And thus, CWS did not qualify for the contract. The agency asked for more evidence, investigated Bid Solve's claims, and eventually sided with CWS. See id. ¶¶ 152, 155. In the agency's view, CWS was indeed a small business. Id. ¶ 152. Bid Solve then appealed. But its appeal was dismissed when it never properly served the agency. Id. ¶¶ 166-68.

Next, Bid Solve filed this False Claims Act case against CWS, and its owners, C. William Stearman, and Jennifer Stearman. See generally Compl., ECF No. 1. The Court dismissed some counts and Bid Solve amended its Complaint. See United States ex rel. Bid Solve, Inc. v. CWS Mktg. Grp., Inc., 567 F. Supp. 3d 59, 64 (D.D.C. 2021); Am. Compl., ECF No. 45. Now, Bid Solves sues only CWS and C. William Stearman for fraudulent inducement under the FCA. See Am. Compl. ¶¶ 66-68 (citing 31 U.S.C. § 3729(a)(1)(B)).

Bid Solve's theory goes like this: The Defendants said that CWS was a small business because its average "receipts" were below $7.5 million. But the Defendants misreported CWS's receipts by improperly subtracting certain expenses. When correctly calculated, CWS had average receipts over $7.5 million and thus was not small. See Bid Solve Opp'n at 20, ECF No. 53. So the Defendants lied about CWS's receipts when claiming that CWS was a small business. And those lies induced the agency to award CWS the contract.

The Defendants move for summary judgment. They argue that they win on two key elements of Bid Solve's claim—falsity and knowledge. See Defs. Mem. in Supp. of Mot. for Summ. J. (Defs. MSJ) at 10, ECF No. 52. In their view, CWS's receipts were below $7.5 million. And even if they got that wrong, they at least had good reason for thinking so. See id. at 1-3. Bid Solve moves for partial summary judgment, claiming that it wins on falsity. Bid Solve Mem. in Supp. of Cross-Mot. for Summ. J. (Bid Solve MSJ) at 1, ECF No. 54-1.

II.

To win summary judgment, a party must show that "there is no genuine dispute as to any material fact." Fed. R. Civ. P. 56(a). A dispute is genuine "if the evidence is such that a reasonable jury could return a verdict for the nonmoving party." Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 248, 106 S.Ct. 2505, 91 L.Ed.2d 202 (1986). And a fact is material if it could change the case's outcome. See id. The Court "view[s] the evidence in the light most favorable to the nonmoving party and draw[s] all reasonable inferences in its favor." Mastro v. Potomac Elec. Power Co., 447 F.3d 843, 850 (D.C. Cir. 2006).

The moving party must "identify[ ] those portions of the [record] which it believes demonstrate the absence of a genuine issue of material fact." Celotex Corp. v. Catrett, 477 U.S. 317, 323, 106 S.Ct. 2548, 91 L.Ed.2d 265 (1986) (cleaned up). Then, the opposing party must point to "specific facts showing that there is a genuine issue for trial." Id. at 324, 106 S.Ct. 2548 (cleaned up).

III.

There is no genuine dispute about whether some of Defendants' statements were false. So the Court grants partial summary judgment to Bid Solve about those. But whether Defendants knew that those statements were false is another matter. Because that issue remains disputed, the Court denies Defendants' motion for summary judgment. Their knowledge must be decided by a jury.

A.

In Bid Solve's view, Defendants misreported that CWS was a small business. Recall that to qualify as a small business CWS needed to have average annual "receipts" under $7.5 million over the last three years. So did Defendants misstate CWS's average annual "receipts" as being below $7.5 million? And were Defendants thus wrong to certify that CWS was a small business? The answer to both questions hinges on 13 C.F.R. § 121.104(a) (2016), the regulation that governs how companies must calculate "receipts."

1.

Section 104(a) defines receipts as "all revenue in whatever form . . . reduced by returns and allowances." Bid Solve argues that CWS's receipts were much higher than it reported. It says that Defendants improperly subtracted "flowthrough income" from CWS's revenue when certifying that it was a small business. Bid Solve Opp'n at 1. Defendants disagree. In their view, receipts must be calculated based on the numbers reported in CWS's tax returns. Because they faithfully did that, they cannot have lied. See Defs. MSJ at 1.

Defendants misread the regulation: They were not allowed to rely solely on CWS's tax returns. And because of that, they should have never subtracted "flow-through income" from CWS's total revenue. So CWS's average receipts exceeded $7.5 million and Defendants wrongly certified that CWS was a small business.

First, consider Section 104(a)'s text:

(a) Receipts means all revenue in whatever form received or accrued from whatever source, including from the sales of products or services, interest, dividends, rents, royalties, fees, or commissions, reduced by returns and allowances. Generally, receipts are considered "total income" . . . plus "cost of goods sold" as these terms are defined and reported on Internal Revenue Service (IRS) tax return forms . . . . Receipts do not include net capital gains or losses; taxes collected for and remitted to a taxing authority if included in gross or total income, such as sales or other taxes collected from customers and excluding taxes levied on the concern or its employees; proceeds from transactions between a concern and its domestic or foreign affiliates; and amounts collected for another by a travel agent, real estate agent, advertising agent, conference management service provider, freight forwarder or customs broker. For size determination purposes, the only exclusions from receipts are those specifically provided for in this paragraph. All other items, such as subcontractor costs, reimbursements for purchases a contractor makes at a customer's request, investment income, and employee-based costs such as payroll taxes, may not be excluded from receipts.

(1) The Federal income tax return and any amendments filed with the IRS on or before the date of self-certification must be used to determine the size status of a concern. SBA will not use tax returns or amendments filed with the IRS after the initiation of a size determination.

(2) When a concern has not filed a Federal income tax return with the IRS for a fiscal year which must be included in the period of measurement, SBA will calculate the concern's annual receipts for that year using any other available information, such as the concern's regular books of account, audited financial statements, or information contained in an affidavit by a person with personal knowledge of the facts.

Section 104(a) is best read as follows: The first sentence gives the baseline definition of receipts. Receipts are "all revenue . . . reduced by returns and allowances." 13 C.F.R. § 121.104(a). The provision's third and fourth sentences clarify that only the listed items may be subtracted from the baseline receipts total. See id. ("For size determination purposes, the only exclusions from receipts are those specifically provided for in this paragraph."). The fifth sentence specifies some items that cannot be subtracted from receipts, including "reimbursements for purchases a contractor makes at a customer's request." Id....