According to an April 1 Department of Justice (DOJ) press release, DRI Relays Inc. (DRI), a subsidiary of TE Connectivity Corporation (TEC) and manufacturer of electrical relays and sockets used on military platforms, agreed to pay $15.7 million to settle allegations that it violated the False Claims Act (FCA). The company supplied military parts that failed to meet the required military testing specifications, while falsely certifying that they did. The settlement highlights the benefits of self-disclosures, the importance of robust diligence during the acquisition process, and the lengthy nature of some FCA investigations.
Background on the Case
TEC, which acquired DRI in October 2020, disclosed to the Department of Defense (DoD) in January 2021 that DRI had failed to perform mandatory tests on certain military parts. Specifically, DRI did not conduct the required tests on certain relays and sockets—components essential in maintaining the functionality of military systems. Without the necessary tests, those parts could pose risks to the effectiveness and safety of U.S. defense equipment. Between 2015 and 2021, under various DoD contracts and subcontracts, DRI submitted invoices to the DoD claiming the required tests were conducted, despite knowing that these parts did not meet the testing criteria.
Contractor Considerations
First, the settlement underscores the benefits of self-disclosure of potential violations. According to the DOJ, TEC disclosed the violations to the DOJ, something that may have been required under the FAR mandatory disclosure provisions in FAR 52.203-13, Contractors Code of Business Ethics and Conduct. See also FAR 9.406-2(b)(1)(vi) (making a knowing failure to make a mandatory disclosure of credible evidence of certain types of violations or a significant overpayment a basis for debarment). While in a statement to Law360 TEC said that it had “voluntarily disclosed” the compliance gaps to DoD, contractors are reminded that FAR 52.203-13, which must be included in contracts expected to exceed $6 million if the performance period is 120 days or more, requires a covered contractor to timely disclose to the agency Office of Inspector General, with a copy to the contracting officer, credible evidence of an FCA violation or a violation of federal criminal law involving fraud, conflict of interest, bribery, or gratuity violations in Title 18 of the United States Code.
Although it may not apply in the mandatory disclosure context, we note that when contractors voluntarily disclose potential violations, application of DOJ’s disclosure and cooperation policy can result in lower penalties. In considering the value of any voluntary disclosure, DOJ evaluates the following factors:
(1) The timeliness and voluntariness of the assistance.
(2) The truthfulness, completeness, and reliability of any information or testimony provided.
(3) The nature and extent of the assistance.
(4) The significance and usefulness of the cooperation to the government.
Contractors should also consider implementing controls such as an anonymous whistleblower hotline, something arguably mandated by the requirement at FAR 3.1002 and FAR 52.203-13 that contractors have an internal control system that facilitates timely discovery of improper conduct in connection with Government contracts, among other provisions, where employees can submit tips that may otherwise lead to FCA exposure. With an anonymous whistleblower hotline, companies can be alerted to potential violations and consider whether they warrant, or perhaps require disclosure.
Second, the settlement emphasizes that FCA risk must be considered during the due diligence phase of acquiring a government contractor. In its statement to Law360, TEC also stated that it had discovered “gaps in [DRI’s] conformance testing” during the integration process. To the extent possible, contractors should endeavor to conduct robust gap analysis pre-acquisition so that this type of potential exposure can be addressed before closing though valuation adjustments, indemnification provisions, pre-closing disclosure, or other mitigation techniques.
Third, the settlement demonstrates that resolution of these types of issues can sometimes take years, in this case, four years from disclosure to settlement.
Going Forward
The $15.7 million settlement reflects the seriousness of the allegations and the U.S. government’s commitment to ensuring that military contractors fulfill their obligations and provide equipment that meets the highest standards of quality and reliability. In addition, as the federal government continues to pursue new avenues to save money, it is possible that FCA investigations may increase.
Contractors should recognize the importance of reviewing potential violations to determine whether they warrant a disclosure, ensure pre-acquisition due diligence reviews for FCA risk, and understand the lengthy process often involved in FCA investigations.
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