Court tosses case against SBA for awarding billions in small business contracts to Fortune 500 firms

By Tara Mapes | Nov 3, 2016

SAN FRANCISCO - The American Small Business League’s (ASBL) request for an injunction against the Small Business Administration (SBA) for giving federal contracts to Fortune 500 firms was thrown out by the Northern District of California Oct. 18, 2016.

On May 3, 2016, the ASBL filed for an injunction against the SBA asking the court to prevent it “from continuing to misrepresent the attainment of small business contracting goals to Congress and the American public.”

In its complaint the ASBL contends the Small Business Act was enacted to promote the public policy of "preserving and promoting a competitive free enterprise economic system” by ensuring that a reasonable amount of federal contracts are awarded to small businesses, and small enterprises owned by women, minorities, veterans and disadvantaged entrepreneurs. It claims the SBA is awarding contracts to Fortune 500 firms rather than small businesses.

ASBL alleges the SBA used creative accounting in its reports to show it was meeting the threshold of contracts awarded to small businesses when, according to SBA reports, it should have awarded $276 billion in federal contracts to small businesses, but only awarded $91 billion in total. Of that $91 billion, the ASBL alleges the SBA awarded at least half to large businesses in 2015.

 “The SBA has released an annual goaling report, the SBA's assertion that the percentage of the total value of all prime contract awards awarded to small businesses met or exceeded the congressional mandate of 23 percent is false. Although the language of the statute is crystal clear, every year the SBA redefines ‘total value’ as meaning total value minus the contracts SBA decides to exclude from the equation. Using this deceptive practice, the SBA has, for years, been able to boast that the government has attained or exceeded the 23 percent minimum goal based on 'all prime contract awards' when in fact, it hasn't. This creative accounting will continue to thwart the purposes of the statute,” the complaint states.

ASBL argues that the SBA is using this creative accounting to avoid burdensome requirements of “identifying, analyzing and developing remedial plans triggered when the government fails to meet its goals.”

The complaint includes examples of contracts awarded by the SBA in 2015:

Verizon Communications ($108,742,478.00)

Lockheed Martin ($2,241,065.00)

Raytheon ($1,891,266.00)

Johnson Controls ($2,987,330.00)

The complaint also argues the SBA characterized a total of 151 Fortune 500 companies as small businesses in order to claim that 25.75 percent of the total value of all prime contract awards went to small businesses.

The ASBL contends because of what it deemed as the SBA’s “unlawful actions” small businesses may not be receiving the percentage of total government prime contract awards, which they would otherwise receive under the mandates of the Small Business Act.

ASBL requested the court issue an injunction barring the SBA from continuing its alleged deceptive actions and to amend its 2015 goaling reports to conform to the Small Business Act's requirements.

SBA's Motion to Dismiss

In its motion to dismiss the SBA argued the court lacked jurisdiction stating, “The Administrative Procedure Act does not allow federal courts to review everything an agency does. It only permits judicial review of final agency action. If the Small Business Administration is giving Congress bad information, then Congress can do something about it, either in an oversight or legislative capacity. Having requested the report, Congress, not the judiciary, is in the best position to decide whether it's gotten what it wants."

The court agreed and dismissed ASBL’s case earlier this month.

Lloyd Chapman, President of ASBL, told the Northern California Record, “The purpose of the Small Business Act is to ensure small businesses receive 23 percent of federal contracts.When you look at the last paragraph of the ruling, you’ll notice the judge didn’t quote the SBA, he said congress passed the law, but he wasn’t quoting it. The judge dismissed it saying only congress can do something about it. Well, congress only passes laws. When you don’t pay taxes, congress doesn’t come after you, the IRS does. The justice department should be the one deciding on this. Congress passes laws and the judicial branch enforces them. But he didn’t even address that part of my complaint.” Chapman said explaining that the dismissal was based on allegations he challenged the SBA's reporting, not on the actual claims he made against the government for violating the Small Business Act.

“Here’s a way to describe it; say you hire me to paint your house a specific color and to put down and take away drop cloths. Then, I paint one wall of your house hot pink, but I put down and remove the drop cloths. If you sued me for breach of contract it would be like a judge throwing out your case against me because I removed the drop cloths,” Chapman said.

“What the judge should have done is say the Small Business Act says small businesses should receive 23 percent of all contracts and the actions of the SBA are in direct conflict with the law because all Fortune 500 companies are not small businesses. It’s against the congressional intent of the law and the motion should not have been granted,” Chapman told the Northern California Record.

Chapman said the government put a spin on his complaint stating it was about how the government reported the contracts. “So they claimed since I was challenging the way SBA reports, the court had no jurisdiction. The judge agreed that it was not the court’s position to rule on how it reported. But, my lawsuit was to stop the SBA from giving federal contracts to Fortune 500 firms and to stop them from claiming they gave 23 percent to small businesses. The judge doesn’t even mention those two things,” he said.

He explained the Small Business Act states small businesses shouldn’t have more than 500 employees, businesses must report all employees of parent and affiliate companies, and they shouldn’t be dominate in their field. He said none of these Fortune 500 companies meets those requirements, yet the government provided them with billions in contracts.

“They are trying to suppress the evidence,” Chapman said, “A federal judge, accused the government of suppressing evidence in another case of mine; Judge William Alsup said about my case against the Pentagon’s 27-year old test program, ‘So it would be more like a David and Goliath. You get to come in there and be the underdog against the big company and against the big government, they are trying to suppress the evidence,’ so I agree with him. The government is suppressing evidence. Alsup said another quote in a case I won against the Pentagon, ‘The purpose of the Freedom of Information Act is so the public can see how our government works. Congress passed this law to make the small businesses have access to some of these projects, and here is the United States covering it up,’ Judge Alsup accused them, not me, but I agree.”

Chapman said when Eisenhower signed the act in 1958 it wasn’t his intention to give small business contracts to Verizon. He said according to the U.S. census bureau over 90 percent of US firms have fewer than 20 employees.

“Picture a pie chart,” Chapman said as he drew one while speaking, “Picture a big circle and cut a slice that represents 1 percent. That tiny line represents 1 percent of firms. That 1 percent is businesses with over 500 employees, according to the census bureau. The other 99 percent have 500 employees or less. So, we have this gigantic slice and federal says this tiny sliver gets 90 percent of the contracts. What do you think about the government taking your tax dollars and spending it with Fortune 500 companies that aren’t creating new jobs? What do you know about Fortune 500 not paying taxes? 77 percent of federal spending is going to these companies, most who are not paying taxes, and not creating any net new jobs. In reality that little tiny sliver gets about 95 percent of federal spending. The giant slice gets 5 percent. They are giving the federal contracts to Fortune 500 firms. Think about it, ninety-five percent of all federal spending goes to 1 percent of US firms that haven’t created a net new job since 1980 and don’t pay the taxes you pay.”

“How does this benefit the government? What happens as a result of this? I’ll only speak to facts,"Chapman said. "The World Bank came out recently, they did a study on the ease of starting a new business in different countries; the USA ranked 49th. We’re 20 trillion in debt and America is 49th in the ease of starting a new business. The result of 20 years of anti-small business policies have devastated the middle class. Home ownership is at a 48 year low; poverty is at a 12 year high, 45 million Americans live below poverty. Birth rates are down six consecutive years because of economic concerns. More people between the ages of 25 and 35 are living at home. Economic recovery is at the slowest rate since 1949. The $276 billion given by SBA would be the largest economic stimulus program for middle class in history. But year after year they divert it to Fortune 500 companies who don’t pay taxes,” Chapman told the Northern California Record.

The Small Business Act provides penalties and prison time for a company that represents itself as small business. The Small Business Jobs Act of 2010 added to the penalties for misrepresentations by firms providing, " The law establishes a legal standing of “presumption of loss” when a business misrepresents its ownership status or size in winning a government contract. This allows a federal agency to claim a loss on the purchase, enabling those agencies, including the Department of Justice, to vigorously pursue fraudulent firms."

Chapman said, "The (law) says for every dollar they get is a dollar in damages.  If I go to court and show a Fortune 500 misrepresented one of their divisions as a small business, every dollar would be applicable under false claims act, there would be treble damages, punitive damages and legal fees,” Chapman said. “My lawsuit was largest lawsuit ever filed against the U.S. because of number of people being attacked by it and the volume of money. My lawsuit would redirect trillions back to the middle class economy over the next 10 years. This is the largest lawsuit filed against the U.S. government and it’s unreported in the media. Think about it.”

He said the government also approved a policy in 2015 that provides a loophole for large businesses to escape liability for misrepresenting they were a small business to obtain contracts called Safe Harbor from Fraud Penalties. It reads, " An individual or business concern will not be subject to the penalties imposed under 15 U.S.C. 645 (a) where it acted in good faith reliance on a small business status advisory opinion accepted by SBA under §?121.109."

“Now, to get out of trouble for obtaining federal contracts illegally all you have to do is say you acted in good faith. This goes to show you how far they’ll go to protect what they’re doing. The SBA is supposed to represent small businesses and they aren’t. But I am."

Chapman compared his lawsuit to Edward Snowden.  “I think I’m more controversial than Snowden,” Chapman said. He said no one was criminally prosecuted in Snowden's case, no one lost their jobs and no one was imprisoned over the government tapping Americans' wireless devices. " Nothing happened, if my lawsuit went forward, for all of these companies and defense contractors who have misrepresented their firm as a small business, there would be jail time and fines. We are talking about billions in criminal penalties and people going to prison.”

Chapman said he is going to appeal the decision soon. He also said he has additional plans on fighting the government. 

"They said I don’t have the legal authority to challenge the way they report on things, but I do have the ability to challenge final rules. So, I am going to challenge every final rule the SBA has put out for the last decade."

Chapman said when he reviewed the final rules he found each rule reduces the volume of contracts that goes to legitimate small businesses and increases the volume that goes to big businesses and that is what he intends to challenge.  

“My lawyers tell me I’ve won over 100 legal battles against federal governments,” Chapman told the Northern California Record. “I started filing them around 1989. The government will tell you that I am a conspiracy nut and con man and nothing I say is true. But, you can’t win that many if you’re a conspiracy nut. What else would you expect them to say, though? Admit that I’m right?”

This story was updated on Nov. 6 with additional figures from the ABSL on how much it alleges the SBA awarded to small business.

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