United States ex rel. Sansbury v. LB & B Assocs., Inc.

• Decision Date: 16 July 2014
• Docket Number: Civ. Action No. 07–251 EGS
• Citation: 58 F.Supp.3d 37
• Parties: United States of America, ex rel. Steven O. Sansbury, et al., Plaintiffs, v. LB & B Associates, Inc., et al., Defendants.
• Court: U.S. District Court — District of Columbia

58 F.Supp.3d 37

United States of America, ex rel. Steven O. Sansbury, et al., Plaintiffs

v.LB & B Associates, Inc., et al., Defendants.

Civ. Action No. 07–251 EGS

United States District Court, District of Columbia.

Signed July 16, 2014

Jay P. Holland, Matthew M. Bryant, Joseph, Greenwald & Laake, P.A., Greenbelt, MD, for Plaintiffs.

Brian J. Markovitz, Joseph, Greenwald & Laake, P.A., Greenbelt, MD, for Plaintiffs/Defendants.

Roscoe C. Howard, Jr., Leasa M. Woods Anderson, Andrews Kurth LLP, Paul J. Puryear, Jr., Law Offices of Rudolph Acree Jr., Washington, DC, Benjamin N. Thompson, Jennifer M. Miller, Wyrick, Robbins, Yates & Ponton, LLP, Raleigh, NC, for Defendants.

Brian P. Hudak, Laurie J. Weinstein, U.S. Attorney's Office, Washington, DC, for United States of America.

MEMORANDUM OPINION

EMMET G. SULLIVAN, United States District Judge

Pending before the Court are two motions to dismiss filed by Defendants Edward Brandon, Lily Brandon, and LB & B Associates, Inc. (hereinafter, “LB & B”) (collectively, “LB & B Defendants”). Relators brought this action against the LB & B Defendants, as well as Bering Straits AKI, Chilkat Services, Inc., and two individual representatives of those companies pursuant to the qui tam provision of the False Claims Act (“FCA”), 31 U.S.C. § 3730(b). Relators allege that Defendants violated the FCA with respect to their participation in the Small Business Association's (hereinafter “SBA”)Section 8(a) program and 8(a) Mentor–Protégé program. On April 14, 2011, the Government filed its notice of election to intervene in part, electing to intervene in Relators' claims only insofar as they relate to the LB & B Defendants' participation in the Section 8(a) program, but not the Mentor–Protégé program. The Government subsequently filed its complaint in intervention on August 19, 2011. The Government's complaint in intervention asserts two additional causes of action against LB & B Defendants for common law negligent misrepresentation and fraud against the LB & B Defendants. Pending before the Court are the LB & B Defendants' motions to dismiss both complaints, pursuant to Rules 9(b) and 12(b)(6) of the Federal Rules of Civil Procedure.¹ Having carefully considered Defendants' motions to dismiss, the responses and replies thereto, the applicable law, and the record as a whole, Defendants' Motion to Dismiss Relators' complaint is DENIED and Defendants' Motion to Dismiss the Government's complaint in intervention is GRANTED IN PART AND DENIED IN PART .

I. Background

A. Statutory Framework

1. The Section 8(a) Program

The SBA's Section 8(a) program is a business development program for small businesses owned by individuals who are socially and economically disadvantaged. See 15 U.S.C. § 637(a) ; 13 C.F.R. § 124.1. Qualifying small businesses that are owned or controlled by socially or economically disadvantaged individuals may apply to the SBA, and if accepted into the program, they are eligible to receive preferential treatment in the form of “set aside” contracts. They are also eligible to receive technological, financial, and practical assistance. Relators' Compl. ¶ 15; Gov't Compl. ¶¶ 19–21.

In order for a small business to participate in the program, it must apply to and be certified by the SBA. It must first meet certain size requirements, see 13 C.F.R. Part 21, and it must also be “disadvantaged,” which requires that at least fifty one percent of the business is owned and controlled by one or more individuals who are socially and economically disadvantaged.See 15 U.S.C. § 637(a)(4)(A)–(B) ; 13 C.F.R. § 124.105. The program defines socially “disadvantaged individuals” as those who have been “subjected to racial or ethnic prejudice or cultural bias within American society because of their identities as members of groups and without regard to their individual qualities.” 13 C.F.R. § 124.103(a) ; see also 15 U.S.C. § 637(a)(5). “Economically disadvantaged” individuals are those socially disadvantaged individuals “whose ability to compete in the free enterprise system has been impaired due to diminished capital and credit opportunities as compared to others in the same or similar line of business who are not socially disadvantaged.” 13 C.F.R. § 124.104(a) ; see also 15 U.S.C. § 637(a)(6)(A). A company selected for the program must annually certify its continued eligibility for the Section 8(a) program and must provide financial and other information to the SBA. See 13 C.F.R. §§ 124.112(b), 124.509(c), 124.601, 124.602. A company may remain in the program for a maximum of nine years if it continues to meet the eligibility requirements throughout the period, and it may participate in the program only once. See 13 C.F.R. §§ 124.2, 124.108(b).

Individuals who are members of certain racial and ethnic groups are considered to be presumptively socially disadvantaged. See 13 C.F.R. § 124.103(b)(1) ; see also 15 U.S.C. § 631(f)(1)(B)–(C) (explaining that socially disadvantaged individuals include “members of certain groups that have suffered the effects of discriminatory practices or similar invidious circumstances over which they have no control,” including, but not limited to “Black Americans, Hispanic Americans, Native Americans, Indian tribes, Asian Pacific Americans, Native Hawaiian Organizations, and other minorities”). This presumption is rebuttable, and may be overcome by credible evidence to the contrary. See 13 C.F.R. § 124.103(b)(3). An individual who is not a member of one of these groups may nonetheless gain admission into the Section 8(a) program by establishing by a preponderance of the evidence that he or she is socially disadvantaged under criteria set forth in 13 C.F.R. § 124.103(c).

In the context of the Section 8(a) program, “control” requires that “both that disadvantaged persons have the power to control the company and that such persons actually exercise their authority to control the company.” Gov't Compl. ¶ 26; see also 13 C.F.R. § 124.106. Although a non-disadvantaged individual may be involved in the management of a company that participates in the Section 8(a) program, that individual may not, inter alia, exercise actual control of the company or receive compensation that exceeds that of the socially or economically disadvantaged person who controls the company. See 13 C.F.R. § 124.106(e). Further, non-disadvantaged individuals who “transfer majority stock ownership or control of the firm to an immediate family member within two years prior to the application and remain involved in the firm as a stockholder, officer, director, or key employee of the firm” are subject to a rebuttable presumption that they actually control the firm. Id. § 124.106(f).

2. Mentor–Protégé Program

In addition to the Section 8(a) program, the SBA also administers a Mentor–Protégé program, which allows a non-Section 8(a) company to form a joint venture with a Section 8(a) eligible company. The program is designed to encourage an approved mentor, that is not a Section 8(a) concern, to provide managerial, financial, and technical assistance in order to improve a protégé's ability to bid on and compete for government contracts.See 13 C.F.R. § 124.520(a)-(b). The protégé must be in the development stage of participation in the Section 8(a) program, have never received an 8(a) contract, or have a size that is half the size of the corresponding NAICS code. Id. § 124.520(c).

In order to participate in the program, a mentor and protégé must submit their joint venture agreement to the SBA for approval. Id. § 124.513(a)(1). The Section 8(a) participant must be the “managing venturer” of the joint venture, and an employee of the Section 8(a) concern must be designated as the project manager responsible for overall contract performance. Id. § 124.513(c)(2). Where the “8(a) concern brings very little to the joint venture relationship in terms of resources and expertise other than its 8(a) status, SBA will not approve the joint venture agreement.” Id. § 124.513(a)(2). The applicable regulations specifically provide that “[n]o determination of affiliation or control may be found between a protégé firm and its mentor based on the mentor-protégé agreement or any assistance provided pursuant to the agreement.” Id. § 124.520(d)(4).

B. Factual Background

LB & B is a North Carolina company that has its principal place of business in Columbia, Maryland. It was certified by the SBA as a Section 8(a) concern on April 6, 1995. This certification was based on the status of President Lily Brandon, who is an Asian Pacific American. Relators' Compl. ¶¶ 7, 29; Gov't Compl. ¶ 12. Both Relators were employed at LB & B—Steven O. Sansbury was employed as an Operations and Maintenance Institutional Planner from 2000 until his separation from the company in 2003, Relators' Compl. ¶ 4; James Buechler was employed as an Assistant Project Manager at the FDA from July 2003 until August 2005, Id. ¶ 5.

1. Allegations in the Government's Complaint in Intervention²

LB & B was incorporated in 1992. Govt. Compl. ¶ 28. Initially, the Board of Directors of the company had six members, only two of whom were socially and economically disadvantaged: Ms. Brandon and her son, F. Edward Brandon Jr. Relators and the Government allege that neither possessed sufficient skills or experience to run a company engaged in LB & B's main lines of business—government contracts, manufacturing, facilities management, and government services. Id. ¶¶ 29–30. Three of the other directors, including Defendant F. Edward Brandon, Ms. Brandon's husband, had extensive experience in government contracting and the other lines of business. Id. ¶ 31. Despite her alleged lack of experience, Ms. Brandon was selected as the president of the company. Moreover, though she contributed substantially the same amount as the other directors, Ms. Brandon's financial contribution was treated as equity and she was given 51 percent of the company's stock. Id. ¶¶ 33–34.

In 1994, prior to applying for Section 8...