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Fraud in Small Business Innovation Research Yields Settlement

Recently the U.S. Attorney’s Office for the Western District of Washington announced a False Claims Act settlement stemming from fraud in the Small Business Innovation Research (“SBIR”) program. nLight Photonics, Inc. (nLight), a privately-held, Vancouver, Washington-based manufacturer of high performance diode and fiber lasers, agreed to pay $420,000 to resolve allegations that between 2004 and 2013, it received multiple government grants and contracts for which it did not legitimately qualify under the SBIR because of its ownership structure. For the purposes of the SBIR program, the term “small business” is defined as a for-profit business with fewer than 500 employees, owned by one or more individuals who are citizens of, or permanent resident aliens in, the United States of America.

 

The SBIR program was established by Congress in 1982, and amended several times since. Currently eleven federal agencies participate in the program, awarding millions of dollars of grants and contracts each year. It is a highly competitive program that encourages domestic small businesses to engage in Federal Research/Research and Development (R/R&D) that has the potential for commercialization. Id. Government funding is available because many early-stage innovation are still too high risk for private investors, including venture capital firms.

 
The fraud was discovered by an employee of the Department of Energy, one of the government agencies from whom SBIR funding was obtained. Apparently, the employee who was overseeing both an nLight SBIR grant as well as an SBIR grant awarded to a company that nLight had acquired, made an inquiry of nLight which brought its ineligibility to light. Indeed, nLight had successfully sought funding from the Army, Navy, Air Force, NASA and Department of Energy to further develop its laser technology, which has military and related applications of interest. Each of these agencies participated in the investigation, along with the Department of Justice, to reach the settlement. According to one news report, by 2011 the privately-held company nLight had secured $110 million in equity financing from Silicon Valley investors and was on a steady growth trajectory that led to speculation that it would initiate a public stock offering.

 
It is encouraging to see a False Claims Act case made “the old-fashioned way”—through discovery by agency contracting personnel and investigation by government law enforcement working together with DOJ. It reminds us all that without the benefit of a whistleblower, there are plenty of FCA cases the government can and should make.  To be sure, there are many cases of complicated fraud where a whistleblower is needed, and one wonders how much sooner the fraud here would have been uncovered if a whistleblower had come forward.  In addition, while so much of the attention of the FCA these days is on health care fraud cases, we would all do well to remember how many billions of dollars the federal government spends each year procuring other goods and services, from research as here, to military equipment for our soldiers.