Federal prosecutors use the nasty 'K' word

CONSTRUCTION ATTORNEY CONTRACTORS ARE USED to hearing four-letter words, but one particular double four-letter word is striking fear in their hearts. It is "kickback," and government attorneys are throwing it out a lot lately. It refers to: "... any money, fee, commission, credit, gift, gratuity, thing of value or compensation of any kind which is provided ... to any prime contractor, sub-contractor

CONSTRUCTION ATTORNEY

CONTRACTORS ARE USED to hearing four-letter words, but one particular double four-letter word is striking fear in their hearts. It is "kickback," and government attorneys are throwing it out a lot lately.

It refers to: "... any money, fee, commission, credit, gift, gratuity, thing of value or compensation of any kind which is provided ... to any prime contractor, sub-contractor ... for the purpose of improperly obtaining or rewarding favorable treatment ... in connection with a prime or subcontract." 41 U.S.C. 52.

It is illegal to give kickbacks and it is illegal to take them.

There doesn't have to be any proof that the government paid more as a result of the kickback either. The theory is that just as government employees should not be able to coerce vendors to pay them for the privilege of selling goods to the government, contractors (and subcontractors) who are in a position to control access to the right to sell to the government should be equally unapproachable. The quality of the product sold and its bottom-line price to the government should be the determining factors — not who greased the palm of the guy or gal controlling the purchasing.

A federal contractor has recently gotten in trouble under the same statute for setting up a program with its subcontractors called a "GSA Strategy." The subs were assured of getting the work on General Services Administration projects if they would agree to give this contractor a final price that was at least 15% lower than was bid to other contractors.

While this conduct violates a whole variety of laws (not the least of which are antitrust laws that prohibit agreements to restrain trade or give discriminatory and unjustified discounts), it also constitutes a kickback — a price concession given to reward the general contractor for giving a sub a government subcontract. The case has not yet gone to trial, but the publicity has already blackened reputations.

In a couple of other recent cases, the government has taken the position that a surety bond agent that rebated part of its commission on bond premiums back to its contractor-client was giving the client an illegal kickback. Even though the rebate program was not specifically related to government contracts (it was based on the total volume of premium), it certainly covered the premiums for those jobs and the government was billed at the gross price, not the net price. The contractor never went back at the end of the year and sent the government a check for its portion of the rebate. The contractor ended up paying a huge fine to the government. Any supplier or subcontractor who has such a volume rebate program could be vulnerable too, if the government chose to prosecute him.

I have heard that prosecutors are using this statute to attack conduct that many subs and suppliers to government contractors would not ever have considered: the value of fishing trips, airline tickets, concert and tournament tickets and other gifts in excess of the IRS de minimis standard. They have demanded that government contractors give them lists of everything of value that any of their employees received from those who have been given subcontracts or hope to get the opportunity to do business on government contracts. Those lists can be very long.

How far can and should this go? In the case of a surety bond premium, the amount initially billed by the agent was specifically listed in the first payment application and paid by the government, with no subsequent credit given back, so it was easy to identify.

But in many situations a vendor may not know how much of its products is being pass through to a government buyer or how the contractor is charging for it. Also, if participation in golf tournaments, complete with complimentary balls and caps is enough to support a prosecution, few contractors will be left unscathed.

A number of states have similar anti-kickback laws. While it is not very likely that we will see many independent investigations of contractors for routine, marketing-type conduct, it is not at all unusual to find government attorneys scrutinizing such activities in the course of defending claims against the government. In fact, most of the claims discussed above in this column came to light in the course of lawsuits filed by contractors to recover extra costs on government projects. As a result, when deciding whether to pursue such claims, contractors now have to consider a whole new set of factors.

This area is not so different than the subject of contingent insurance commissions discussed in an earlier column (June 2005, pg. 44), where many state attorneys general decided that it was unfair to customers for their brokers to not disclose that they might receive extra compensation for steering business to a particular insurance company. Sometimes it takes a giant "wake-up call" to clean up a business practice that has gotten too far out of the norm.

Susan McGreevy is a partner at Husch & Eppenberger, Kansas City, Mo., 816/421-4800, e-mail to susan.mcgreevy@husch.com

TAGS: Law