Government Contracts Blog

Six Questions To Ask In Figuring Out Whether The Recovery Act Buy American Requirement Applies To You

Sheppard Mullin — Fri, 12 Mar 2010 11:44:14 -0800

Nearly one year ago on February 17, 2009, President Obama signed into law the American Recovery and Reinvestment Act of 2009 (Pub. L. No. 111-5), more commonly known as the Stimulus Act, the Recovery Act, or ARRA. One of the key features of the Act included a "Buy American" requirement, requiring domestically manufactured "iron, steel, or manufactured goods" to be used in Recovery Act funded projects (located at Section 1605 of the Act). This requirement has proven to be a collossal headache for vendors supporting Recovery Act projects and has also proven to be immensely complicated for the good men and women in Government (including those at the State and local levels), who are faced with the task of figuring out how, where, and when the Recovery Act Buy American requirement applies.

There are two sets of ARRA Buy American regulations: (1) regulations at FAR Subpart 25.6, relating to contracts directly with the U.S. Government and its agencies (such as the General Services Administration); and (2) regulations issued by the Office of Management and Budget (OMB) at 2 C.F.R. Part 176, Subpart B, relating to grants from the U.S. Government, as well as contracts with State and local governments that receive stimulus funds from the U.S. Government via grants. While these two sets of regulations are not identical, the structure and language in the regulations do identify at least six basic questions that should help you answer the threshold question of "Does the Recovery Act Buy American requirement apply to me?" The answer may surprise you. Unfortunately, it is not an easy question to answer.

Question 1: Are ARRA funds being used to purchase your products?

o If "yes," then Section 1605 may apply to your purchase. Typically, the person placing the order (whether a Government or prime contractor employee) should know whether an order is funded by the Stimulus Act. Moreover, the question of whether ARRA funds are being used may be painfully obvious if you are being asked to agree to the boiler-plate ARRA terms and conditions – particularly those relating to ARRA whistleblower rights, ARRA audit rights, and ARRA reporting requirements (discussed previously here and here). Or, if you think that your would-be buyer is being overly cautious in its use of ARRA clauses because it is not sure of the source of funding, there is always the ARRA web site (www.recovery.gov), which can help identify the funding source. (Just click on the tab "Where is the Money Going").

o If "no," then Section 1605 will not apply, because the ARRA Buy American requirement applies only to funds appropriated under the Recovery Act. However, be aware that other country of origin requirements may still apply if federally appropriated funds are being spent, because other statutes like the Buy American Act, the Trade Agreements Act, or the Buy America Act (applicable to Department of Transportation construction projects) could still apply. (The interplay of these various statutes is discussed here).

Question 2: Is the main project for which goods are being procured a "construction project?"

o If "yes," then Section 1605 may apply to your purchase. FAR Part 25 distinguishes between purchases of "supplies" and purchases of "construction materials" (with both "construction" and "supplies" defined at FAR 2.101). In implementing Section 1605 through the FAR rules, the U.S. Government has embraced this "supply" vs. "construction materials" distinction, indicating that the ARRA Buy American requirement applies only to construction projects. While the OMB regulations do not necessarily enshrine this same rubric of "supply" vs. "construction material" that is contained in the FAR, all of the guidance issued to date by the U.S. Government seems to recognize that whether the core project is a "construction project" is a key threshold question.

o If "no," then Section 1605 will not apply. While there may be some who argue that the language of Section 1605 broadly applies to "construction, alteration, maintenance and repair" – not merely to "construction projects" – the Government has (thus far) consistently applied Section 1605 only to construction projects. Moreover, most authorities seem to be applying Section 1605 co-extensively with Section 1606, which imposes a "minimum wage"-style requirement for construction contracts under the Davis-Bacon Act. Since the Davis-Bacon Act applies exclusively to construction projects, this seems to further support the conclusion that the ARRA Buy American requirement does not extend to the mere purchase of "supplies," when those "supplies" are not "construction materials" under the regulations.

Question 3: Is the project for a "public building and public work?"

o If "yes," then Section 1605 may apply.

o If "no," then Section 1605 should not apply. Note that the two sets of regulations include two different definitions of "public building and public work." FAR 22.401 defines this term broadly to include virtually any project funded with federal money. It does not require ownership by the U.S. Government as a precedent. If your project is covered by the FAR, then answering Question 3 is easy – if federal funds are involved, it is a public work. However, the OMB regulations (2 C.F.R. 176.140(a)) define "public building and public work" more narrowly, recursively referring to "a public building of, and a public work of, a government entity." At least with regard to public buildings, this different definition seems to indicate that it needs to be "of" a governmental entity and government ownership may be required.

Question 4: What is being delivered to the construction site?

o The FAR rules define the ARRA Buy American restriction in terms of the "construction materials" (both manufactured and unmanfactured) that are brought to the construction site. See FAR 25.003 and 25.601. The product that is actually delivered to the construction site is, under the definitions in the regulations, the "construction material" covered by the Buy American restriction. Materials purchased directly by the Government and delivered as such to the work site are "supplies," not "construction materials." See FAR 25.003. Ostensibly, where component parts are delivered off-site and manufactured into a product that is subsequently delivered to the construction site, it is the later-manufactured module that should qualify as the delivered "construction material" subject to the ARRA restrictions.

o While the OMB rules also consider what is being delivered to the construction site, they do not use the exact same terminology as in the FAR rules. The OMB rules define the Buy American restriction in terms of "manufactured goods," not "construction materials," which could arguably mean that the OMB rules impose a broader obligation on contractors. While we hope that the two requriements would be applied consistently across all Recovery Act projects, we would not be surprised to find contracting officers applying the OMB regulations slightly differently based on the different language.

o An additional point worth emphasizing is that the ARRA Buy American requirement looks only at the country of origin of the "construction material" or "manufactured good" delivered to the construction site. ARRA does not concern itself with the country of origin of the various components of the end-product delivered to the construction site – only the final construction material or manufactured good.

Question 5: What is the dollar value for the main construction project?

o If the prime-level project is valued at $7.443 million or more, then the ARRA-funded contract may recognize an exception for iron, steel, or manfuactured goods manufactured either in the U.S. or in a free trade agreement (FTA) country. (The interplay of FTA exception was previously discussed here). Under the regulations, if the FTA exception is satisfied, then products from a FTA country are considered the same as U.S.-origin alternatives.

o If the prime-level project is valued at less than $7.443 million, then domestic manufactured goods must be supplied for the project, absent an exception. The three exceptions to this rule are: (1) that requiring domestic goods would not be in the public interest (as determined solely by the U.S. Government); (2) that a domestic alternative to the foreign-made project is not available (through Domestic Nonavailability Determinations or DNADs); or (3) that the inclusion of exclusively domestic-made products increases the cost of the overall procurement by at least 25%. The regulations outline complicated waiver requirements that must be satisfied if any of these exceptions are invoked.

Question 6: Who is the ultimate customer?

o If the ultimate customer is a State or local government, then the FTA exception discussed above with Question 5 may not be available. Typically, FTAs apply only at the federal level, with limited applicability at the State or local level (as we previously discussed here). (A complete list of covered State and local governments is available at 2 C.F.R. Part 176, Appendix to Subpart B).

o Consequently, even if a project is over $7.443 million, if a State or local government is not covered under the FTA, then the FTA exception will probably not apply – even if the State or local government would love nothing more than to have the FTA exception available. The other three exceptions discussed above, may still be available to allow use of certain foreign-made products, but these exceptions are narrow and difficult to satisfy.

Applying the ARRA Buy American requirement in actual practice is complicated and difficult. Many in Congress and in the U.S. Chamber of Commerce have criticized the requirement as counterintuitive, disruptive and unnecessary. A recent report from the Government Accountability Office indicated that the difficulties in applying the Buy American requirement have complicated and delayed some of the critical stimulus projects for at least five federal agencies. Moreover, the requirement also quite nearly sparked off a trade war between the U.S. and Canada, one that only recently seems to be nearing a point of resolution as the U.S. and Canada negotiate revisions to their FTAs, allowing both Canadian and U.S. companies access to State, Provincial and local government procurements.

Still, regardless of whether the Buy American requirement is "workable," "bad policy," or even just plain "wrong," the fact remains that the domestic preference requirement is a fact of life for anyone performing work on a Stimulus project. Before you agree to perform on a contract including the ARRA Buy American requirement, you should be fully aware of what obligations you will be required to meet, including whether any of the statutory exceptions may also be available.

For additional discussion in this blog about the ARRA Buy American requirement, click here, here and here.For discussion of ARRA generally, click here.

Authored by:

David S. Gallacher
(202) 218-0033
dgallacher@sheppardmullin.com

Government Oversight of ARRA Dollars -- A True Faustian Bargain

Sheppard Mullin — Fri, 12 Mar 2010 11:33:56 -0800

The intrusive nature of the oversight mechanisms that are available to the Government under the Recovery Act is unprecedented in federal contracting. It is a subject that has been dealt with previously in this blog (click here, here, here and here). For a useful PowerPoint summary of these mechanisms, click here. This link was used as the basis for a presentation at the recent 16th Annual Procurement Institute in which the acceptance of ARRA dollars was said to evoke memories of a 1959 movie starring James Cagney and Don Murray entitled "Shake Hands With the Devil." We leave it to you to decide if the title is apt.

Authored by:

John W. Chierichella
(202) 218-6878
jchierichella@sheppardmullin.com

and

Anne B. Perry
(202) 218-6875
aperry@sheppardmullin.com

Stay Tuned for Implementation of Ancillary Cryptography Changes Adopted by December 2009 Wassenaar Plenary Session

Sheppard Mullin — Fri, 12 Mar 2010 11:26:20 -0800

At their December 2009 Plenary Session, the member countries of the Wassenaar Arrangement on dual-use export controls adopted a new Note 4 to Category 5 - Part 2 of the Dual-Use List covering information security and encryption.

The new note provides that Category 5–Part 2 does not apply to items incorporating or using "cryptography" if:

a. The primary function or set of functions is not any of the following:

1. "Information security";

2. A computer, including operating systems, parts and components therefor;

3. Sending, receiving or storing information (except in support of entertainment, mass commercial broadcasts, digital rights management or medical records management); or

4. Networking (includes operation, administration, management and provisioning);

b. The cryptographic functionality is limited to supporting their primary function or set of functions; and

c. When necessary, details of the items are accessible and will be provided, upon request, to the appropriate authority in the exporter’s country in order to ascertain compliance with conditions described in paragraphs a. and b. above.

This change will soon be implemented in the United States, and it represents an interesting variation on the "ancillary cryptography" exception published by the Commerce Department's Bureau of Security in October 2008. See Encryption Simplification, 73 Fed. Reg. 57,495 et seq. (Oct. 3, 2008). That action eliminated the requirement of a review request filing and twice-a-year reporting under the ENC license exception, 15 C.F.R. sec. 740.17 (2009), but retained the 5D002 classification for items with ancillary cryptography.

The 2008 U.S. action introduced the following definition of ancillary cryptography which included a Nota Bene with a laundry list of examples to illustrate products that qualify for self-classification as ancillary:

Ancillary Cryptography. The incorporation or application of ‘‘cryptography’’ by items that are not primarily useful for computing (including the operation of ‘‘digital computers’’), communications, networking (includes operation, administration, management and provisioning) or ‘‘information security’’. N.B. Commodities and software that perform ‘‘ancillary cryptography’’ (e.g., are specially designed and limited to: piracy and theft prevention for software, music, etc.; games and gaming; household utilities and appliances; printing, reproduction, imaging and video recording or playback (but not videoconferencing); business process modeling and automation (e.g., supply chain management, inventory, scheduling and delivery); industrial, manufacturing or mechanical systems (including robotics, other factory or heavy equipment, facilities systems controllers including fire alarms and HVAC); automotive, aviation and other transportation systems). Commodities and software included in this description are not limited to wireless communication and are not limited by range or key length.

Note 4 as adopted by the Wassenaar Plenary carries forward the U.S. definition of products with "ancillary cryptography" as those whose primary purpose is not information security, computing, communications or networking, but it goes further by removing them entirely from Category 5 – Part 2. In this respect, they become like "[c]ommodities and software specially designed for medical end-use," which are excluded from Category 5 – Part 2 by current Note 1. See 15 C.F.R. pt. 774, supp. 1 at page 754 (2009).

Unlike the U.S. rule from 2008, however, the Wassenaar Note 4 omits the list of examples in the Nota Bene published by the Commerce Department in October 2008. It is not clear at this time whether some Wassenaar members will implement Note 4 in a manner that differs from these examples previously published in the United States.

What is clear is that a new regulation can be expected this year to implement this change in the United States. Commerce officials foreshadowed this in public statements at their Update 2009 Conference Encryption Workshop on October 2, 2009. See here, at page 29 ("As you probably know, the Wassenaar meets in plenary in December, and we anticipate that the note four will be implemented and published soon after the December plenary in the Wassenaar lists, and we thought it was an important enough development to mention it here today").

The 2008 Wassenaar Plenary changes were not published in the Federal Register until December 2009, 74 Fed. Reg. 65,999 et seq. (Dec. 11, 2009), so the publication of Note 4 may not occur very soon, but when it does exporters will be spared the task of remembering that their decontrolled items containing encryption for ancillary purposes remain classified as 002 and require reliance on the ENC license exception. An interesting further consequence of the change will be that many items with ancillary cryptography will end up becoming EAR99. This will have an impact on some reexport scenarios.

One must wonder about the logic of excluding ancillary cryptography in this manner while items with encryption limited to password protection and user authentication remain in 992. Heretofore, exporters have done well to consider first whether an encryption function is limited to password protection or user authentication. Under Note 4, they will want to retool their decision trees to start with the ancillary exception since it will take items outside of Category 5, Part 2 altogether.

Authored by:

Curtis Dombek
(213) 617-5595
cdombek@sheppardmullin.com

Witness Statements: Attorney Work Product?

Sheppard Mullin — Fri, 12 Mar 2010 11:10:24 -0800

A recent California Court of Appeals case, Coito v. Superior Court of Stanislaus County, __ Cal. App. 4th __ (March 4, 2010), highlights an important discrepancy between state and federal protection of attorney work product as it applies to witness statements. While the federal rules and case law support a qualified privilege with regard to such statements (requiring a showing of substantial need to permit discovery), the law applicable in state courts may differ. The court in Coito, as further discussed below, followed a line of California cases that place witness statements outside of the attorney work product doctrine.

A. Witness Statements

A witness statement, or "previous statement" under Federal Rule of Civil Procedure 26(b)(3)(C), is either:

(i) a written statement that the person has signed or otherwise adopted or approved; or

(ii) a contemporaneous stenographic, mechanical, electrical, or other recording — or a transcription of it — that recites substantially verbatim the person's oral statement.

Taking a witness statement, in the context of an investigation or preparation for litigation, can serve a number of important uses. It allows for an informal and potentially "off-the-record" atmosphere for collecting facts about the case, without formal notice to an opponent. If recorded, the statement could later be used at deposition or at trial as a recorded recollection, to refresh a witness' memory, or to impeach the witness based on a prior inconsistent statement.

Unlike interviews taken with an attorney's own client, however, the statements of percipient witnesses (not the attorney's client) will not be protected by the attorney-client privilege. Instead, such statements are afforded protection under the attorney work product doctrine.

B. Attorney Work Product Protection of Witness Statements Under Federal Law

The attorney work product doctrine, and its application to witness statements, was first recognized in Hickman v. Taylor, 329 U.S. 495 (1947). The decision revolved around a sinking tugboat and the statements of four surviving crew members. An attorney hired by the defendant tugboat owners took the statements of the four witnesses, which the plaintiff then sought through discovery. Although the district court granted a motion to compel, this was reversed by the Third Circuit, and the Supreme Court sided with the defendants. The Supreme Court held that such matters were not discoverable without a showing by the requesting party of "necessity or any indication or claim that denial of such production would unduly prejudice the preparation of petitioner's case." Id. at 509.

The current basis for work product protection is set forth in Federal Rule of Civil Procedure 26(b)(3):

3) Trial Preparation: Materials.

(A) Documents and Tangible Things. Ordinarily, a party may not discover documents and tangible things that are prepared in anticipation of litigation or for trial by or for another party or its representative (including the other party's attorney, consultant, surety, indemnitor, insurer, or agent). But, subject to Rule 26(b)(4), those materials may be discovered if:

(i) they are otherwise discoverable under Rule 26(b)(1); and

(ii) the party shows that it has substantial need for the materials to prepare its case and cannot, without undue hardship, obtain their substantial equivalent by other means.

(B) Protection Against Disclosure. If the court orders discovery of those materials, it must protect against disclosure of the mental impressions, conclusions, opinions, or legal theories of a party's attorney or other representative concerning the litigation.

Under the Federal Rules, the federal courts have allowed this qualified or limited privilege to protect the disclosure of witness statements in discovery absent a showing of "substantial need" and lack of ability to obtain "substantial equivalent[s] by other means." An important caveat to this requirement is that Rule 26(b)(3)(C) permits any person to request, without a showing of "substantial need," the person's own previous statement.

C. Attorney Work Product Protection of Witness Statements Under California Law

However, as a recent California case illustrates, the treatment of witness statements as attorney work product in state courts may differ. In Coito v. Superior Court of Stanislaus County, __ Cal. App. 4th __ (March 4, 2010), a 2-1 split decision by California Court of Appeals, the Court held that recorded witness statements were not protected by the attorney work product doctrine.

In response to decisions of the California courts (see, e.g., Greyhound Corp. v. Superior Court, 56 Cal. 2d 355 (1962) (deciding that the work product doctrine did not apply as a privilege under California law)), California amended its Civil Discovery Act in 1963 for the purposes of protecting attorney work product. As stated in California's Code of Civil Procedure, Section 2018.020, it is the policy of California to do both of the following:

(a) Preserve the rights of attorneys to prepare cases for trial with that degree of privacy necessary to encourage them to prepare their cases thoroughly and to investigate not only the favorable but the unfavorable aspects of those cases.

(b) Prevent attorneys from taking undue advantage of their adversary's industry and efforts.

California's attorney work product doctrine, codified in Section 2018.030, sets forth both an absolute and a qualified privilege:

(a) A writing that reflects an attorney's impressions, conclusions, opinions, or legal research or theories is not discoverable under any circumstances.

(b) The work product of an attorney, other than a writing described in subdivision (a), is not discoverable unless the court determines that denial of discovery will unfairly prejudice the party seeking discovery in preparing that party's claim or defense or will result in an injustice.

Whether, and if so where, witness statements fall into this scheme has been a topic over which the California courts have reached somewhat mixed conclusions, and the California Supreme Court has not weighed in on the matter. While an attorney's impressions and theories, as reflected in a written summary of a witness interview, fits squarely within the absolute privilege, the treatment of the factual portions of the interview and summary—or more to the point, a verbatim transcription or recording of the interview—is less clear.

One line of cases holds that written or recorded statements of percipient witnesses are not protected as qualified work product even when prepared or recorded by the attorney or the attorney's agent. These cases hold that the statements are only evidentiary in character, not "derivative" or "interpretive." See, e.g., Kadelbach v. Amaral, 31 Cal. App. 3d 814, 822-23 (1973) (tape recorded statements made by witnesses to attorney were presumed to be evidentiary and nonderivative in character).

At the other end of the spectrum is Nacht & Lewis Architects, Inc. v. Superior Court, 47 Cal. App. 4th 214 (1996), where a California Court of Appeal indicated that whenever an attorney records in writing the substance of a witness' statement, all of the written notes or recorded statements are protected by the absolute work product privilege. The rationale of Nacht & Lewis is that whom an attorney chooses to interview, and what was asked, are invariably affected by the attorney's impressions and theories.

In Coito v. Superior Court of Stanislaus County, __ Cal. App. 4th __ (March 4, 2010), a California Court of Appeals again attempted to pick apart the attorney work product doctrine as it applies to witness statements. In its 2-1 decision, the Court sided with the authority that recorded statements of percipient witnesses were discoverable and not privileged, either absolutely or qualifiedly.

The dissenting opinion, which goes to such lengths as to urge the California Supreme Court to address the subject, espouses a framework that would more closely follow that of the federal courts:

First, the absolute work product privilege is not applicable to a recorded witness statement merely because it was recorded by an attorney or his agent. Rather, the absolute privilege applies, if at all, to the attorney's "impressions, conclusions, opinions, or legal research or theories" (Code Civ. Proc., § 2018.030, subd. (a)), and matters inextricably intertwined therewith.

Second, where any attorney (or the attorney's agent), in the course of preparing or investigating a client's case, interviews a percipient witness therein and records what that witness said, the recording constitutes qualified work product of the attorney. While such recording is protected by the qualified privilege, it is still potentially discoverable depending on a moving party's showing of need under section 2018.030, subdivision (b).

Dissenting and concurring opinion, slip op. p. 1.

D. Conclusion

While the federal rules quite clearly attach a qualified privilege to recorded witness statements, the same protections may not apply in state courts, such as in California. Practitioners should be aware of both standards to the extent they might apply when developing any investigation or litigation strategy. If Coito endures, it could be critically important, in California at least, to know the forum in which you may end up litigating well before the litigation commences. For now at least, the privilege hangs on the answer to that question.

Authored by:

Christopher E. Hale
(213) 617-5513
chale@sheppardmullin.com

ABA Publishes Guide To Mandatory Disclosure Rule

Sheppard Mullin — Wed, 17 Feb 2010 09:09:38 -0800

Following the publication of the FAR’s Mandatory Disclosure Rule in late 2008, the Public Contracts Section of the American Bar Association organized a Task Force of leading Government contracts attorneys, DOJ fraud lawyers, federal investigators, and other experts to consider the implications of the new requirements and to draft written guidance to fill the many gaps inherent in the Rule. Sheppard Mullin’s Jonathan Aronie served on the ABA Task Force.

The Guide – published in January, and formally entitled “The Guide To The Mandatory Disclosure Rule: Issues, Guidelines and Best Practices” – is the only publication of its kind, and provides essential guidance concerning, among other things:

What kinds of misconduct must be reported under the new rule
What kind of evidence qualifies as “credible evidence”
How to deal with subcontractors
How quickly disclosures must be made
The mechanics of making a disclosure
What kind of “full cooperation” the Government expects
How to preserve confidentiality and privileges when making a disclosure
How to structure company compliance programs and internal controls
What effect will disclosures have on past performance evaluations

Copies are available to the general public through the ABA web site for $55. For our early analysis of the Rule when originally promulgated, click here, here and here.

You Just Can't Bribe People Like You Use To . . . (Or, More Seriously, DOJ Investigation Signals A New Era in FCPA Enforcement)

Sheppard Mullin — Wed, 17 Feb 2010 09:00:04 -0800

On January 19, 2010, the Department of Justice (“DOJ”) unsealed sixteen indictments charging twenty-two individuals with violations of the Foreign Corrupt Practices Act (“FCPA”), allegedly arising from schemes to bribe foreign government officials. The DOJ also announced that, in connection with the indictments, the FBI had executed fourteen search warrants across the U.S., and the City of London police had executed seven search warrants in the U.K. The product of an FBI sting operation hailed in a DOJ press release as “the largest single investigation and prosecution against individuals in the history of the DOJ’s enforcement of the [FCPA],” the indictments may signal a fundamental shift in the DOJ’s ongoing campaign “to erase foreign bribery from the corporate playbook.”

The FCPA generally prohibits companies and their officers, directors, employees, and agents from offering, paying, promising to pay, or authorizing to offer or pay money or “anything of value” to foreign officials for the purpose of obtaining or retaining business. The indictments name sixteen companies based in the U.S., the U.K., and Israel, all of which manufacture or sell military and law enforcement products running the gamut from grenade launchers to armored vehicles. The defendants allegedly participated in an FBI-designed sting operation that led the defendants to believe that they were securing a contract to outfit the presidential guard of an unidentified country in Africa by paying bribes to that country’s minister of defense.

On January 18, 2010, all twenty-two defendants were arrested, twenty-one of them while they were attending an industry trade show in Las Vegas. The sting operations, and the resulting indictments, potentially mark a paradigm shift in the way the DOJ enforces the FCPA. They teach at least three critical lessons.

First, the DOJ is taking aim at individual violators of the FCPA. With the recent indictments, the DOJ has brought charges against almost the same number of individuals that it indicted for FCPA violations (or who pled guilty to FCPA-related charges) in all of 2009, i.e., twenty-three. Part of the strategy appears to rely on the powerful deterrent effect of personal liability, since a conviction for conspiracy to violate the FCPA carries a maximum prison term of five years. The DOJ seems to be betting that an executive views the threat of jail time quite differently from a monetary fine against the company.
Second, the DOJ will be proactive, not relying solely on companies to perform their own investigations and voluntarily disclose their violations. The DOJ and FBI affirmatively sought out and built cases against the twenty-two defendants. For proof of the DOJ’s commitment to aggressive enforcement, one need look no farther than the search warrants executed across the U.S. and U.K. in connection with the indictments or the DOJ’s recent claim to have currently over 140 open investigations into FCPA violations. Not only will the DOJ’s willingness to invest resources likely increase the reach and frequency of its enforcement efforts, but it should also drive up the “price” for settling cases. Having spent the time and money to indict, it’s unlikely that the DOJ will agree to take a loss in resolving the case. In terms of priority for federal law enforcement officials, foreign bribery may soon belong in the same league as narcotics and organized crime.
Third, gone is any notion that only large multinational corporations need to be concerned about being a target of FCPA enforcement. With some notable exceptions, nearly all the companies involved in the recent indictments are relatively small, many with fewer than twenty employees. One is a family business with just four employees, owned and operated by siblings (now both defendants). Before the recent sting, most publicized FCPA cases involved large, multinational corporations, such as Siemens and Chevron. As a result, many small to medium-sized companies may have believed they were not at risk due to their low profile. Recent events demonstrate that belief to be mistaken. Any company, regardless of its size, engaging in international commerce is now a viable potential target.

This shift in focus is particularly significant because financial constraints often make smaller companies more likely to engage in activity that violates the FCPA, whether “knowingly” or not. Such companies often lack the resources of larger corporations, which leads them to affiliate with independent agents to represent them in foreign countries. These agents often lack even a rudimentary understanding of the FCPA. To compound matters, smaller companies often have little or nothing in the way of FCPA compliance programs since many view such programs as cost prohibitive. However, these recent indictments suggest that even a relatively small investment in a robust compliance system can result in significant net savings.

These fundamental changes in the DOJ’s approach to enforcement are likely to render many corporate FCPA compliance policies inadequate and outdated. To avoid expensive and protracted violations, and even jail time for employees, businesses must adjust their compliance programs with an eye toward (at least) the lessons outlined above. Companies cannot write off a potential FCPA investigation or fine as a cost of business so long as the DOJ seeks to impose individual criminal liability. Instead, a company’s commitment to self-monitor must be at least as rigorous as the DOJ’s commitment to aggressively and proactively investigate potential violations.

Authored by:

Bethany Hengsbach
(213) 617-4125
bhengsbach@sheppardmullin.com

But You Promised!Ten Simple Steps for Avoiding the "Apparent Authority" Trap

Sheppard Mullin — Wed, 17 Feb 2010 08:36:15 -0800

In our claims practice, we frequently represent clients seeking compensation for constructive changes. One of the most common obstacles to recovery arises where the Government employee who ordered the additional or changed work lacked the authority to do so. Invariably, the Government’s first line of defense in these cases is the well-established principle that the Government is not bound by the unauthorized conduct of its agents. Although there are certain narrow exceptions to this general rule, the absence of actual express authority can make it significantly more difficult to recover for a constructive change.

Our experience suggests that the following steps help avoid the apparent authority trap:

Do remember that the Government is bound only by the authorized conduct of its agents. Promises or representations that exceed a Government employee’s authority will not bind the Government, regardless of whether that Government employee appeared to have the requisite authority.
Do know your Contracting Officer and the limits on his or her authority. Most Contracting Officers have a warrant that identifies their agency and any monetary limits on their authority. If you do not know the scope of a Government employee’s authority, do not hesitate to ask.
Do not assume that a Government employee is a Contracting Officer, or otherwise has the authority to bind the Government, simply by virtue of his or her position. The fact that a Government employee has an impressive title or rank, or appears to be a superior of the Contracting Officer, does not mean that he or she has contract authority.
Do remember that the Contracting Officer is the only individual authorized to issue orders under the Changes Clause. Other Government employees, including program managers, inspectors, technical personnel, and negotiators, generally do not have the authority to order changes, waive requirements, or settle claims.
Do not rely on verbal orders or representations. Request that all instructions, orders, or directives be made in writing and signed by the Contracting Officer.
Do carefully review any documents designating a Government employee as an authorized representative of the Contracting Officer. It is critical to understand the scope and limitations of each representative’s authority.
Do not assume that a Government employee who has been delegated the authority to issue orders under a contract has the same authority as the Contracting Officer. In many cases, ordering officers do not have the authority to issue change orders or add funds to a contract.
Do remember that Government employees, including Contracting Officers, rarely have the authority to waive the requirements of applicable statutes or regulations and never have the authority to order that you engage in illegal conduct. If a Government employee directs or requests that you perform illegal conduct, contact your counsel immediately.
Do not assume that you lack a remedy if you learn, after the fact, that your personnel have performed additional or changed work at the direction of a Government employee who lacked the express authority to order that work. Depending upon the facts, you may be able to support a claim based on the doctrines of ratification and/or implied authority.
Do not expect to play by the same rules as the Government. Unlike the Government, a contractor can and usually will be bound by the conduct of personnel with apparent authority. As a practical matter, this means that contractors must carefully monitor their personnel and refrain from engaging in conduct that could lead the Government to believe that an individual has more authority than he or she actually possesses.

Authored by:

Keith Szeliga
(202) 218-0003
kszeliga@sheppardmullin.com

DoD Acts To Rein In DCAA (Again)

Sheppard Mullin — Wed, 17 Feb 2010 08:30:20 -0800

On January 15, 2010, the Department of Defense announced plans to amend the Defense Federal Acquisition Regulation Supplement (“DFARS”) to allow contracting officers to withhold payments from companies with “deficient” business systems in an effort to prevent “unallowable and unreasonable costs on government contracts.” 75 Fed. Reg. 2457. Contracting officers would have the authority to withhold payments on cost reimbursement, incentive, time-and-materials, and labor-hour contracts.

The proposed rule appears to be a DoD effort to rein in the Defense Contract Audit Agency (“DCAA”). We have previously written about (1) how DCAA has engaged in the dark art of intimidation (with historical perspective); (2) how a contracting officer’s mere disagreement with the DCAA could result in DCAA’s referral of that officer to the IG; and (3) DCAA Guidelines that severely restrict an auditor’s exercise of independent judgment. Most recently, we explored the “Top Ten Reasons DCAA Should Let COs Do Their Bloody Job.”

The proposed rule attempts to remedy the internal DoD wrangling by firmly placing with the contracting officer the responsibility for (1) determining if there is a business system deficiency and (2) withholding payment because of that deficiency. While the contracting officer must consult with DCAA, and other cognizant functional specialists, the contracting officer is the ultimate decision maker.

This proposed rule is prompted by the findings of the Commission on Wartime Contracting. The Commission determined that deficiencies in contractor business systems “increased the likelihood that contractors will provide proposal estimates that include unallowable costs or that they will request reimbursement of contract costs to which they are not entitled or which they cannot support.” The Commission also explained that the lack of cooperation between DCAA auditors and contracting officers contributed to the problem.

“Contractor business systems” is broadly defined under the proposed rule as: accounting systems, purchasing systems, estimating systems, earned value management systems (“EVMS”), property management systems, and material management and accounting systems (“MMAS”). The proposed rule includes a detailed description of an acceptable system for each of the six enumerated business systems.

The DCAA auditors and “functional specialists” are required to document deficiencies in a contractor’s business system in a report to the contracting officer. The contracting officer will have the ultimate authority to determine if there is a system deficiency and provide that initial determination to the company.

The company will have an opportunity to respond to the initial determination. The contracting officer will review the contractor’s response in consultation with DCAA auditors and other functional specialists, and issue a final determination. If the contractor demonstrates that its business systems are not deficient or successfully corrects any deficiency, the contracting officer may withdraw the initial deficiency determination and no payments will be withheld.

If the company fails to (1) fix the problems documented in the ACO’s initial determination or (2) submit a corrective action plan within 45 days, the contracting officer may begin withholding 10% of contract payments immediately. If the company submits an acceptable corrective action plan but then does not completely remedy the deficiencies, then contracting officers could withhold 5% of contract payments.

If a company has multiple identified business system deficiencies, the cumulative percentage of payments withheld will not generally exceed 50%. Contracting officers, however, will have the authority to withhold up to 100% of payments for deficient business systems if the contracting officer determines that the identified deficiencies are “highly likely to lead to improper payments being made” or are considered “an unacceptable risk of loss to the government.”

The proposed rule also includes a contract clause that requires companies to certify – there is the liability-laden work again – that they have no major defects in each of the enumerated business systems.

Comments on this proposed rule must be submitted by March 16, 2010.

Authored by:

Jessica Madon
(202) 469-4919
jmadon@sheppardmullin.com

GAO's Bid Protest Annual Report to the Congress for Fiscal Year 2009 - Another Busy Year for GAO, Another Good Year for Protestors

Sheppard Mullin — Wed, 17 Feb 2010 08:24:58 -0800

On January 8, 2010, the Government Accountability Office (“GAO”) submitted its Bid Protest Annual Report to the Congress for Fiscal Year 2009. Overall, the Report reflects that FY 2009 was a busier year for GAO, and a more successful year for protestors, than FY 2008.

More Protests

According to the Report, protestors filed 1,989 protests in FY 2009. This represents a 20% increase over the 1,652 protests filed in FY 2008. The Report attributes half of this increase to GAO’s expanded jurisdiction over task order protests, A-76 filings, and Transportation Security Administration (“TSA”) procurements.

Interestingly, the Report indicates that only 139 task order protests were filed in FY 2009. This represents roughly 7% of GAO’s docket – a far cry from the deluge of protests predicted by the critics of GAO’s expanded task order jurisdiction.

More Hearings

Given the overall increase in bid protest filings, it comes as no surprise that GAO issued more decisions on the merits in FY 2009 (315) than it did in FY 2008 (291). What does come as somewhat of a surprise is that the percentage of cases in which GAO held hearings doubled from 6% in FY 2008 to 12% in FY 2009.

On balance, this increase in the number of hearings is good news for protestors. It reflects more intense GAO scrutiny of agency source selections, since GAO generally does not conduct a hearing unless there is at least some possibility of sustaining the protest. Moreover, we have been involved in several protests where witness testimony was essential to GAO’s understanding of the import of the flaws in the agency’s evaluation and source selection decision.

On the other hand, hearings provide an agency with an opportunity to explain away gaps in the contemporaneous record. They also increase the cost of litigation for protestors and intervenors alike, a fact that we encourage our clients to take into account when considering a protest.

Higher Protest Effectiveness Rate

The Report indicates that GAO’s sustain rate for FY 2009 was 18%, a slight decrease from the 21% rate experienced in FY 2008. This is consistent with the downward trend in GAO’s sustain rate, which has decreased each year since FY 2006, when it peaked at 29%.

Protestors should not be discouraged by this trend. The goal of a protest is to obtain corrective action from the agency. It does not matter whether the corrective action results from a sustained protest or is taken on the agency’s own initiative. Thus, a far more important consideration than the sustain rate is the protest effectiveness rate, measured as the percentage of cases in which the protestor obtains some form of relief.

Notwithstanding the lower sustain rate, the Report reflects an increase in the protest effectiveness rate. According to the Report, the protest effectiveness rate for FY 2009 was 45%, compared to only 42% in FY 2008 and only 37% in FY 2005.

This increase in the protest effectiveness rate is encouraging for protestors. First, and most obviously, it means that protestors are more likely to obtain relief. Second, a higher protest effectiveness rate, combined with a lower sustain rate, indicates that agencies have become more likely to take corrective action, rather than allowing a meritorious protest to go to a final decision. The result – a higher probability of success and the potential for lower litigation costs – is a win-win scenario for protestors.

Increased Utilization and Effectiveness of Alternative Dispute Resolution

The Report indicates that a total of 149 protests were referred to alternative dispute resolution (“ADR”) in FY 2009 – nearly double the 78 protests referred to ADR in FY 2009. The ADR success rate, measured as the percentage of cases referred to ADR that do not require a formal GAO decision, also increased significantly, from 78% in FY 2008 to 93% in FY 2009. This is good news for protestors and intervenors, since ADR frequently reduces the cost of pursuing and defending protests.

Authored by:

Keith Szeliga
(202) 218-0003
kszeliga@sheppardmullin.com

President Obama Issues Memorandum Addressing Tax Delinquency With Government Contractors

Sheppard Mullin — Wed, 17 Feb 2010 08:21:33 -0800

On January 20, 2010, the President issued a Memorandum ordering the Department of the Treasury and the Office of Management and Budget (“OMB”) to block the award of government contracts to companies that are delinquent on their taxes. The Memorandum calls for the review of certifications of non-delinquency, which was added in 2008 to FAR 52.209-5, “Certification Regarding Responsibility Matters.” Citing GAO reports as a justification, the Memorandum states that “Federal contracts are awarded to tens of thousands of companies with serious tax delinquencies.”

The Memorandum requires:

The Commissioner of the Internal Revenue Service to review contractor certifications of non-delinquency pursuant to FAR 52.209-5 and to report back to the President within 90 days regarding their overall accuracy;
The Director of the Office of Budget and Management (“OMB”), working with the Treasury Department and other agency heads, to evaluate the practices of contracting officers and debarring officials in response to contractors’ certifications; and
The OMB Director to report to the President within 90 days about process improvements to ensure that contractors who are considered “delinquent” are not awarded new contracts. This includes a plan to make contractor certifications available in a Government-wide database.

The President also stated that he would ask for legislation from Congress that would sanction contractors for their failure to pay taxes. Additionally, the administration is planning to reintroduce language from last year’s budget that would allow the government to offset payments to contractors by the amount of taxes they owed.

The Memorandum comes at a time of heightened scrutiny for contractors, and is the latest in a series of directives to reduce contracting waste, fraud and abuse.

In light of this Memorandum, contractors should make sure that they document any disputes they have with the IRS in order to prevent the Government from using this policy as leverage for settlement purposes. Additionally, this policy should put contractors on notice that they could receive show-cause notices from suspension and debarment officials when they have a dispute with the IRS.

Authored by:

Jessica Mailman
(202) 741-8435
jmailman@sheppardmullin.com

Novations: A Simple Checklist For A Not So Simple Requirement

Sheppard Mullin — Wed, 17 Feb 2010 08:15:08 -0800

As though the risks inherent in a merger or acquisition were not enough to turn any business person prematurely gray, when one or both of the entities in play are federal contractors, the risks become even greater. One of the primary sources of these additional risks is the federal Government’s novation rules. Anyone looking to buy or sell a federal contractor must be familiar with these rules, which are set out at FAR 42.1204.

In short, the Anti-Assignment Act prohibits the transfer of government contracts to a third party. The Federal Acquisition Regulation (“FAR”) provides, however, that, in certain situations, the Government may consent to such a transfer. If the Government withholds its consent – or if the contractor fails to seek that consent properly – the contractor could be deprived of the benefit of its bargain. A comprehensive due diligence plan, which asks at least the following questions, can alleviate some of this risk.

Is A Novation Agreement Required?

The FAR identifies three situations in which the Government may consent (through the execution of a formal “Novation Agreement”) to the transfer of a federal contract:

The sale of all a contractor’s assets, or the entire portion of the assets involved in performing a contract with a provision for assuming liabilities;
The transfer of assets incident to a merger or corporate consolidation; and
The incorporation of a proprietorship or partnership, or formation of a partnership.

FAR 42.1204(a)(1)-(2). In contrast, the FAR also provides that a novation is not required when a stock purchase is contemplated and when “there is no legal change in the contracting party, and when the contracting party remains in control of the assets and is the party performing the contract.” FAR 42.1204(b). Consistent with the theory behind this exception, federal case law also holds that a novation is not required in the context of certain transfers that occur “by operation of law.”

In the end, a contractor’s novation obligations will depend upon the form of merger/acquisition selected by the parties. While many factors obviously will bear upon that selection, the potential novation obligations should be among them.

What Should Be Included In The “Novation Package”?

Once a contractor has determined that a novation agreement is required, it will need to prepare a “novation package” for submission to the responsible contracting officer (more on this below). While the contracting officer has some discretion in the matter, he/she generally will expect the parties to submit the following materials as they become available

Three signed copies of the proposed novation agreement;
Document describing the proposed transaction (e.g., purchase/sale agreement, memorandum of understanding, etc.);
List of all affected contracts, including: (a) Contract number and type, (b) Name and address of contracting office, (c) Total dollar value, as amended, and (d) Approximate remaining unpaid balance;
Evidence of transferee’s capability to perform;
Authenticated copy of instrument effecting the transfer (e.g., bill of sale, certificate of merger, contract, deed, agreement, court decree, etc.);
Appropriate corporate approval: (a) certified copies of board of directors’ resolution authorizing the transfer, and/or (b) certified copies of stockholder minutes approving the transfer;
Authenticated copy of transferee’s certificate and articles of incorporation (if formed for the purpose of receiving the assets involved in performing the government contracts);
Opinion of Legal Counsel for the transferor and transferee stating that the transfer was properly effected under applicable law and the effective date of the transfer;
Balance sheets of transferor and transferee on the dates immediately before and immediately after the transfer, as audited by independent accountants;
Evidence that any security clearance requirements have been met; and
Consent of any sureties or a statement from transferor that none are required.

FAR 42.1204(e)-(f). The list of required documents may vary depending on the particular form of the transaction, the agency, and/or the preferences of the responsible contracting officer. Id. Also, the responsible CO possesses the discretion to request an “alternative formulation of the information” so long as the Government’s interests are adequately protected. FAR 42.1204(g).

To Whom Should The “Novation Package” Be Submitted?

The “novation package” usually is submitted to a single administrative contracting officer (“ACO”), who will coordinate the novation process on behalf of all interested federal agencies. This single point of contact relieves the contractor of the burden of having to submit paperwork to multiple agencies, and it allows the Government to speak with a single voice.

The appropriate point of contact may vary depending on whether the acquisition involves a single transferor or multiple transferors. In situations involving only one transferor, the FAR provides that, if an ACO has been assigned to any of the contracts, then the “novation package” should be submitted to that ACO or the ACO responsible for corporate office (if the contracts are in more than one plant or division). FAR 42.1202(a)(1)-(2). Alternatively, if an ACO has not been assigned to any of the contracts, then the “novation package” should be submitted to the CO with the largest unsettled dollar balance (unbilled plus billed but unpaid). FAR 42.1202(b).

Where there are multiple transferors, the FAR provides for a slightly different process. If an ACO has been assigned to any of the contracts, the “novation package” should be submitted to the ACO administering the largest unsettled dollar balance. FAR 42.1202(c)(1). If an ACO has not been assigned to any of the contracts, then the “novation package” should be submitted to the CO having the largest unsettled dollar balance. FAR 42.1202(c)(2).

When should I start the novation process?

Experience suggests that companies that involve their contracting officer early in the acquisition process are rewarded with a more speedy novation process. While the FAR identifies the specific elements that should be included in a novation submission, different contracting officers have different practices and different preferences when it comes to novations. Engaging the contracting officer in advance of submitting the actual paperwork in order to get a sense of his/her expectations – or to give you the opportunity to explain why certain documents have or have not been included in the package – usually is a wise approach.

Authored by:

Marko W. Kipa
(202) 772-5302
mkipa@sheppardmullin.com

Understanding GAO's Bid Protest Timing Rules: A Concise Summary For The Uninitiated

Sheppard Mullin — Wed, 17 Feb 2010 08:10:57 -0800

The Government Accountability Office (“GAO”) is a stickler when it comes to the timing of bid protests. One misstep – even if that misstep causes you to miss a deadline by only seconds – and you could find yourself out on the proverbial curb. GAO has a saying when it comes to the timing of its bid protests: “Late is late.” And GAO means it.

A protesting party generally is required to file its protest within 10 days of when it knows or should have known of the basis for its protest, whichever is earlier. Where a party is entitled to a “requested and required” debriefing, GAO’s rules extend the filing date to 10 days following the first date offered for the debriefing. An automatic stay of performance only goes into effect, however, if the awarding agency is notified of the protest by GAO within 10 days of contract award (where a debriefing is not required) or within 5 days of a debriefing (where a debriefing is required). As such, most parties that receive a “requested and required” debriefing smartly elect to file their initial protest within the abbreviated 5-day period to avail themselves of the stay, even though they technically could wait until the 10^th day following the debriefing and still have a timely protest (but without the benefit of the stay).

The filing of the protest begins a 100-day journey that ultimately will result in a GAO decision (unless resolved sooner through a dismissal, withdrawal, or an early decision). A lot happens within these 100 days. And the timing of each event is critical.

Approximately 25 days after the Agency receives notice from GAO of the protest, the Agency is required to provide the protester with a list of the documents that it plans to produce as part of its “Agency Report.”
The Agency next files its Agency Report, generally within 30 days of having received notice of the protest from GAO. The Agency Report is, for all practical purposes, the Agency’s response to the protest accompanied by the relevant source selection materials. The protester may object to the completeness of the Agency’s submissions, and may request that GAO order the production of additional documents.
The protester subsequently replies to the Agency Report through the filing of “Comments” – i.e., its primary substantive brief. The protester must file its Comments within 10 days of receiving the Agency Report or risk dismissal of its protest.
It is within this same 10-day period that the protester must raise any supplemental protest grounds that have come to light as a result of the Agency’s submissions. Protesters typically submit their Comments and supplemental protest grounds in the same document.

GAO possesses the discretion to request additional filings, extend or shorten timelines, and even hold a hearing – so long as it issues its decision within 100 days of protest filing.

With respect to the extension of filing timelines, protesters are well-advised to keep an important caution in mind. The fact that GAO may extend the timeline for filing Comments does not mean that the 10-day time period for filing supplemental protest grounds is likewise extended. GAO’s Bid Protest Descriptive Guide warns that “if a protester waits until the extended due date for filing comments to raise new or amended protest grounds, those grounds may be dismissed if they were raised more than 10-days after the protester learned or should have learned of them.”

A recent GAO decision well illustrates this warning. In January 2009, a disappointed bidder protested its exclusion from the competitive range in a procurement for 25 million doses of an anthrax vaccine. In the course of the protest, GAO granted the protester a one-day extension to file its Comments. As permitted, the protester filed its Comments in a timely fashion, but also raised several new protest allegations at the same time. GAO accepted the Comments, but dismissed the supplemental protest grounds as untimely. See Panacea Biotec, Inc., B-400776, Jan. 21, 2009, 2009 WL 5545554.

The take away point from the Panacea case? An extension of time for one purpose does not equal an extension of time for another. As we said, late is late.

Authored by:

Marko W. Kipa
(202) 772-5302
mkipa@sheppardmullin.com

New 2010 Updates to Buy American and Trade Agreements Dollar Thresholds; Buy American Requirements Remain Elusive and Complicated

Sheppard Mullin — Mon, 11 Jan 2010 07:17:17 -0800

Effective January 1, 2010, the U.S. Trade Representative (USTR), Ronald Kirk, published new dollar thresholds determining the applicability of the Buy American Act (BAA), the Trade Agreements Act (TAA), and (potentially) other "Buy American" preferences to the United States' various international free trade agreements. See 74 Federal Register 68907 (December 29, 2009). The changes to the dollar thresholds are effective through the end of 2011, so it is doubtful that we will see any additional escalation until 2012.

Following are the new dollar thresholds, as published by the USTR, for purchases by most agencies of the U.S. Government:

Trade Agreement	Supply Contract (equal to or exceeding)	Service Contract (equal to or exceeding)	Construction Contract (equal to or exceeding)
Trade Agreement	Supply Contract (equal to or exceeding)	Service Contract (equal to or exceeding)	Construction Contract (equal to or exceeding)
WTO GPA	$203,000	$203,000	$7,804,000
FTAs
Australia FTA	$70,079	$70,079	$7,804,000
Bahrain FTA	$203,000	$203,000	$9,110,318
CAFTA-DR (Costa Rica, Dominican Republic, El Salvador, Guatemala, Honduras, and Nicaragua)	$70,079	$70,079	$7,804,000
Chile FTA	$70,079	$70,079	$7,804,000
Morocco FTA	$203,000	$203,000	$7,804,000
NAFTA
—Canada	$25,000	$70,079	$9,110,318
—Mexico	$70,079	$70,079	$9,110,318
Oman FTA	$203,000	$203,000	$9,110,318
Peru FTA	$203,000	$203,000	$7,804,000
Singapore FTA	$70,079	$70,079	$7,804,000

A few quick notes about these thresholds.

First, there are some agencies of the U.S. Government (such as the FAA) that have separate dollar thresholds. The thresholds listed above will apply to purchases by most federal agencies, but be aware that your customer could easily be the exception that proves the rule.
Second, there are slightly different dollar thresholds for purchases by certain state or local governments that are spending federal funds subject to the BAA or TAA. These alternate thresholds are outlined in the USTR notice for you to peruse at your leisure. Enjoy.
Third, just because the USTR has issued an edict stating that these changes are "effective January 1, 2010," does not necessarily mean that the rest of the federal Government will immediately recognize the new thresholds. When the dollar thresholds were last updated in February 2008 or when Taiwan was recently added as a designated country under the TAA in July 2009 (discussed here and here), several of our clients informed us that their Contracting Officers were unwilling to recognize the change until a formal change was made to the Federal Acquisition Regulation. No doubt, you should engage with your Contracting Officer if any of these new dollar thresholds work to your advantage so that your contract with the U.S. Government can be modified accordingly. It will not necessarily happen "automatically." As for a formal change to the FAR, we expect that an interim rule will probably be published next month.
Fourth, it is unclear how, exactly, these changes will impact other "Buy American" provisions such as Section 1605 of the American Recovery and Reinvestment Act of 2009 (ARRA). Currently, interim rules implementing Section 1605 (FAR Subpart 25.6) place the dollar threshold at $7,443,000. The ARRA final rules have been under consideration since July 2009, but we would not be surprised to see the final ARRA Buy American rules (whenever they are ultimately published) incorporate the new, revised dollar threshold of $7,804,000. So much for predictability in the regulatory process.
Finally, if your head is spinning with regard to all of these different "Buy American" requirements, all signs seem to point to these issues getting even more complicated. Section 4002 of H.R. 2847 (one of the final omnibus appropriations bills, which appropriates funds for nearly a dozen federal agencies, including the Department of Justice, Department of Commerce and NASA) includes a provision extending the ARRA Buy American requirements to funds appropriated under H.R. 2847. Part of the so-called "Jobs for Main Street Act" or "Stimulus Part II" (as some have dubbed it), this plainly demonstrates the tendencies toward "Buy America creep" about which we have previously warned. Further emphasizing this issue, Congressman Daniel Lipinski (D-IL) and Senator Russell Feingold (D-WI) have both introduced legislation (H.R. 4351 and S. 2890) that would significantly expand the impact of the BAA and make it more difficult to obtain waivers. One cannot help but wonder if a Trade War is exactly what the U.S. economy needs right now. But the mongers are most assuredly beginning to monger.

Authored by:

David S. Gallacher
(202) 218-0033
dgallacher@sheppardmullin.com

COFC Endorses CDA Claim For Breach Of "Fair Opportunity To Be Considered"

Sheppard Mullin — Mon, 11 Jan 2010 07:09:42 -0800

The Federal Acquisition Streamlining Act's bid protest bar precluded contractors from challenging the award of a task or delivery order, subject to several limited exceptions -- i.e., if the task or delivery order increased the scope, period or maximum value of the underlying IDIQ contract. Recent amendments to the Act expanded GAO's bid protest jurisdiction to include challenges to task or delivery order awards valued at over $10 million. These amendments also provided for enhanced competition procedures for task or delivery order awards valued in excess of $5 million, but did not vest GAO or the Court of Federal Claims with jurisdiction to entertain bid protests based on alleged violations of those procedures. Thus, contractors seeking redress for agency errors in connection with the award of task or delivery orders valued at under $10 million were for the most part "out of luck."

Efforts to directly break-through FASA's bid protest bar proved largely unsuccessful. Rather than continue to confront the prohibition head-on, contractors sought a way to by-pass the Act. Contractors found this passageway by asserting a CDA claim in lieu of filing a bid protest. Specifically, contractors alleged that agency errors during the acquisition process breached the underlying contract's or the FAR's "fair opportunity to be considered" provisions. In a series of cases, the Boards of Contract Appeals thoughtfully considered these CDA-based arguments and concluded that such causes of action were not foreclosed by FASA. See Burke Court Reporting Co., DOT BCA No. 2058, Sept. 11, 1997, 97-2 BCA ¶ 29,323; Community Consulting Int'l, ASBCA No. 53489, Aug. 2, 2002, 02-2 BCA ¶ 31,940; L-3 Communications Corp., ASBCA No. 54920, 06-2 BCA ¶ 33,374.

As we pointed-out in an earlier blog article, the Court of Federal Claims was not as receptive to this type of CDA claim. The Court indicated, albeit in dicta, that it "does not agree with the theory that actions, that are in essence bid protests of task order awards, can be re-characterized as contract disputes in order to create jurisdiction in this court or in an agency board of contract appeals." A&D Fire Protection, Inc. v. United States, 72 Fed. Cl. 126, 135 (2006). Although we believed that the facts in A&D Fire Protection did not lend themselves to COFC jurisdiction, we also felt that the Court would reach a different conclusion if confronted with the right set of circumstances. Specifically, in our Public Contract Law Journal article, we explained that "[i]t remains to be seen … whether the court will reach a similar conclusion when presented with a factual scenario where the contractor bases its cause of action on the CDA and seeks only monetary damages, as opposed to injunctive relief."

The Court of Federal Claims recently encountered such a factual scenario and sided with the Boards in accepting jurisdiction over the matter. Digital Techs., Inc. v. United States, No. 08-604C, 2009 WL 4785451 (Fed. Cl. Dec. 9, 2009) ("DTI"). Contractors now will have at their disposal favorable precedent from the Boards and the COFC to support their CDA breach claims. Contractors must be certain, however, not to blur the line between a CDA claim and a bid protest. The Government will seize on any indicia that the contractor is prosecuting a bid protest under the guise of a breach claim to argue that the contractor's complaint is barred by FASA's bid protest prohibition. Fortunately, the Court of Federal Claims in DTI provided a list of key factors it will consider in determining whether a Complaint is a breach of contract claim or a task order or delivery order protest. Contractors asserting a breach of a "fair opportunity to be considered" should undertake the following steps to protect their CDA claims against a FASA-based dismissal:

Identify the "fair opportunity" provisions that have been breached;
File a written claim with the agency contracting officer demanding a sum certain;

Certify any claim exceeding $100,000;
Receive a final decision from the agency contracting officer before appealing to the Board or COFC (or, if a final decision has not been received from the agency contracting officer in a timely fashion, rely on customary "deemed denial" standards in appealing to the Board or COFC);
Seek monetary damages in both the claim and the Complaint; and
Refrain from seeking an automatic stay, temporary restraining order, or preliminary or permanent injunction, or any other form of relief that seeks to overturn the award or alter the course of contract performance.

In conclusion, both the Boards and the COFC have accepted jurisdiction over CDA claims alleging that an agency deprived a contractor of a "fair opportunity to be considered" for a task or delivery order award. If a contractor properly frames the Complaint, the Government will be hard-pressed to argue, as it frequently does, that the action is nothing more than a "thinly disguised protest."

One final note -- the COFC decision in DTI only addressed the Government's motions to dismiss. While the contractor in DTI overcame a significant jurisdictional hurdle, it must now not only prove its case on the merits, but it also must demonstrate its entitlement to damages. As we saw in a recent Board decision, a contractor may have to settle for B&P (i.e., reliance damages) if it cannot meet the more demanding standard for lost profits. L-3 Communications Corp., ASBCA No. 54920, May 5, 2008, 08-1 BCA ¶ 33,857. We will have to wait to see if DTI encounters evidentiary problems and damages limitations at the Court of Federal Claims.

Authored by:

Marko W. Kipa
(202) 772-5302
mkipa@sheppardmullin.com

Not-So Meaningful Discussions: The Hidden Peril of a "Good" Proposal

Sheppard Mullin — Mon, 11 Jan 2010 06:42:26 -0800

As the closing time for receipt of proposals approaches, controlled chaos starts to take over. For one reason or another, changes may be made to your Company's proposal that prevent it from putting its best foot forward. You are certain that the proposal meets the Solicitation requirements, but you also believe that one section of the proposal could have been better developed. While you would have liked further to have revised the proposal, you were forced to make sacrifices due to time constraints. You nevertheless were hopeful that the shortcomings would be addressed during discussions and in your final proposal revision (FPR). After several hectic days of red team review, your Company's proposal is submitted to the agency in the nick of time.

As you suspected, the agency, following an initial review of proposals, provides your Company with a series of Items For Negotiation (IFNs). Much to your surprise (and delight), your primary area of concern goes unmentioned in the IFNs. You assume that the agency does not take issue with that part of your proposal and you leave that section untouched when preparing your FPR. Several months later, the Agency issues its award decision and you learn from the award notification letter that someone else received the award. At your debriefing, you further learn that the primary discriminating factor between your Company's proposal and the awardee's proposal was the very area you initially perceived as "weak" and which the agency failed to mention during discussions. Frustrated by the agency's silence during discussions, you confidently file a bid protest at the Court of Federal Claims (COFC) alleging a lack of meaningful discussions. Unfortunately, you may be in for another surprise.

The COFC recently confronted a comparable issue and upheld the agency's award decision. Structural Assocs. Inc. / Comfort Sys. USA (Syracuse) Joint Venture v. United States, No. 09-372C, --- Fed. Cl. ---, 2009 WL 4609255, slip op. at 9-11 (Dec. 3, 2009). In that case, the agency did not raise its concerns about the contractor's lack of experience during discussions. Id. at 9. The agency subsequently downgraded the contractor's rating from "excellent" to "good" under one of the main evaluation factors and used the contractor's lack of experience as the primary discriminating factor in its best value decision. Id. The Court found no fault in the agency's conduct. Id. at 9-11. Since the area of concern was neither a significant weakness nor a deficiency, the agency was not required to raise the issue during discussions. Id. at 10-11. The Court also was not swayed by the contractor's assertion that it could have elaborated upon its specialized experience if the agency raised the issue during discussions because the proposal as submitted was responsive to the Solicitation requirements. Id. at 11.

The COFC's decision reinforces the principle that an agency need not raise every item during discussions that could be improved. See FAR 15.306(d)(3). Per the FAR, the contracting officer (CO) is only required to raise significant weaknesses or deficiencies during discussions. See id. While the CO is "encouraged" to discuss other aspects of the proposal, the decision to do so rests within the CO's discretion and judgment. See id. Against this backdrop, the fact that your Company's proposal was "acceptable" could allow the agency to remain tight-lipped about an area of concern and could ultimately cost your Company the award. While such a turn of events must be squared against the FAR's direction that discussions should "maximiz[e] the Government's ability to obtain best value," it remains a very real possibility. Thus, it is certainly worthwhile to go the extra mile to ensure that your Company's proposal makes an "excellent" – and not just a "good" – first impression.

It is, of course, paradoxical that an inferior offer is entitled to more information from the Government than a “good” one, and thus to better insight into what must be done to cross the finish line ahead of the competition. But this paradox is the law. The late Erwin Griswold was often fond of saying that “Good is the enemy of excellence.” The Dean may have been speaking in general terms when he dispensed this sage advice to his students and colleagues. As Structural Associates demonstrates, however, his advice has direct applicability to proposal preparation. Maybe the former Dean of the Harvard Law School and Solicitor General of the United States under two Presidents was, at heart, a frustrated Government contracts lawyer.

Authored by:

Marko W. Kipa
(202) 772-5302
mkipa@sheppardmullin.com

DOD Director of Industrial Policy Assails Bid Protest Process -- "Don't Confuse Me With the Facts"

Sheppard Mullin — Tue, 08 Dec 2009 12:48:17 -0800

If the whispering campaign is true and the Obama Administration has in fact embarked on a “war against contractors,” then Brett Lambert may well have been designated to “take the point.”

As reported recently, the inaugural interview of DOD’s new Director of Industrial Policy was one for the ages. In short order, Mr. Lambert lambasted Government contractors as a whole for asserting their right to protest Government misconduct in the award of contracts, threatened a veritable jihad against “the serial protesters,” accused protesters of disregarding the interests of the war-fighters by delaying their access to needed supplies, and apparently left the impression that legislation to repeal or significantly curtail the protest rights accorded by the Competition in Contracting Act was not out of the question. Along the way, he decried the “$1,000-an-hour” bid protest lawyers who purportedly frustrate our national defense, made some incredibly uninformed statements about the law, and -- oh, by the way -- misstated the GAO statistics that formed the very basis for his screed. A report of the interview can be found at Bloomberg.com.

What Mr. Lambert did not acknowledge, of course, was the proverbial “elephant in the room,” i.e., the amazing success rate of the protests he deplores, a success rate that is driven not by the contractors but by the DOD agencies whose conduct of acquisitions is all too often determined by the Government Accountability Office to have been arbitrary, capricious, devoid of reason and/or inconsistent with law or regulation. Mr. Lambert surely realizes, does he not, that the lawyers who write the decisions sustaining those protests are Federal employees and that -- unless there is some hidden, under the table budget of which we are all unaware -- not one of them is paid “$1,000-an-hour”?

There are, of course, many ways to calculate success rates at the GAO. The GAO publishes annually the statistics relating to its protest docket, including the percentage of cases in which it provides the protester with some form of relief. But any true measure of protest success must also take into account those cases that do not go to decision because the protest process exposes the flaws in the Government’s acquisition so clearly that either (a) the agency folds its hand before the GAO even speaks, or (b) the agency abandons its defense once the GAO has given it a non-binding “outcome prediction” that signals the death knell of the original source selection decision. Although there are calculations that can run much higher, a conservative estimate of successful protests, so defined, can easily reach 25% per year. Mr. Lambert decries this outcome, essentially implying that the protesters (and their lawyers) are unpatriotic and enemies of the war-fighters. But, Mr. Lambert, what rational enterprise entrusted with the safety of the men and women who put themselves in harm’s way to enforce your national and international policy goals would accept a 25% error rate in the processes that put in their hands the arms, ammunition, and weapon systems they need both to defend our nation and to defend their very lives? Would you, Mr. Lambert, buy a car for your family knowing that there was a 25% error rate in the factory that furnished that vehicle for their use at speed on a crowded highway? Don’t you think our war-fighters are entitled to as much from you and your colleagues? Isn't "getting it right" more important than just "getting it done?"

Let’s spend a few minutes analyzing Mr. Lambert’s “facts,” starting with the lowest of the low hanging fruit.

First, let’s consider the “$1,000-an-hour” bid protest lawyers that seem to worry and anger Mr. Lambert so much. As lawyers who are often retained to engage in the bid protest process, our response to Mr. Lambert would be simple -- “From your lips to God’s ears.” The “$1,000-an-hour” bid protest lawyers he decries do not exist. They are like the hobgoblins that we trot out at Halloween to frighten those who are as yet unaccustomed to life’s realities.

Second, “companies can bill legal costs to the Pentagon as general overhead,” a comment designed to suggest that the Government pays for the companies’ bid protest costs. This is a statement that would be, as our partner Louis Victorino often says (albeit with no claim of authorship), “significant -- if true.” It is, however, palpably false. Perhaps there is no copy of the Federal Acquisition Regulation in Mr. Lambert’s Pentagon office. But his staff should provide him one, open it to Section 31.205-47(f)(8), and permanently affix a Post-it™ to that page. Anyone familiar with protests knows what it says, i.e., that costs are “unallowable if incurred in connection” with “Protests of Federal Government solicitations or contract awards . . .” So much for that bogeyman.

Third, Mr. Lambert asserted that there was a need for, and the Pentagon had initiated a study for, the evaluation of the “causes and costs of a record 611 [DOD] contract-award protests in 2008,” which he described as a 24% “spike” in protest activity, a figure that he purportedly derived from GAO data. Let’s take a moment or two to look at and analyze the underlying GAO data.

As the GAO itself has explained, its statistics count each protest and each supplemental protest filed by any offeror in connection with a given procurement as a separate protest for reporting purposes. As a result, the data simply do not inform the reader with respect to the number of procurements challenged, but rather, only the total number of protests filed in connection with the procurements that are challenged. Take for example the hypothetical case of a multiple award DOD contract -- the incidence of which is expanding in near geometric fashion in recent years. Assume seven protesters (and, yes, this happens much more frequently than one might think). For the purposes of GAO’s statistics, the mere involvement of seven protesters would count as seven protests. And if each of the protesters had filed only one supplemental protest upon access to the underlying record (a not unusual occurrence), then the procurement would be counted in the GAO reported statistical data as fourteen protests. One procurement under challenge; 14 protests for statistical purposes. Which figure is more informative in terms of the overall impact of the protest process on DOD? The 1 or the 14? I would respectfully submit that if you have an axe to grind, you opt for the larger number because it unreasonably skews the data to support your point. Which is precisely what Mark Twain meant when he cautioned with respect to the three kinds of lies -- “Lies, damned lies, and statistics.”

It is for this reason, perhaps, that the GAO did not ever characterize its 2008 protest experience with respect to DOD procurements as a “spike.” To the contrary, GAO concluded that, “historically,” protests lodged against DOD procurements in 2008 were “lower than average.” And, in a separate release, GAO noted that “…while the number of DOD protests filed with GAO has fluctuated significantly over the past 20 years (FY 1989 to FY 2008), the last 5 years reflect relatively low numbers of DOD protests filed, in terms of the historical trends.” (emphasis added).

A picture is often useful in dispelling the suggestive impact of political rhetoric, so let’s look at GAO’s pictorial history of bid protests and see how it matches up with Mr. Lambert’s description of 2008 as a “record” year for protests against DOD:

Some "record." Some "spike."

Fourth, Mr. Lambert is laboring under the apparent misconception that protests are outpacing the growth in DOD spending, a “fact” that he presumably tosses on the table as evidence of the frivolity of those “record” protests. Mr. Lambert’s position is stated in simple terms -- “protests increased 38 percent from 2001 to 2008 as the overall value of defense contracts awarded in the eight years rose 120 percent.”

Let’s start with his mathematics. The last time I looked, 38% was less than 120%. Perhaps DOD uses a different math book, but if it does, it is also a different math book than the one used in early 2009 by the Congressional Research Service -- "[t]he overall dollar value of DOD contracts has increased proportionally more than the number of protests filed with GAO." Mr. Lambert’s words sound convincing, but as the Bee Gees once sang so many years ago, “It’s only words.” His math will not score high on anyone’s SAT.

Fifth, we come to the Director’s most obvious attempt to win the hearts and minds of the defense contractors on whom DOD’s soldiers, sailors and airmen rely for their very lives, a direct attack on the contractors’ patriotism, and an explicit assertion that they subordinate the war-fighters’ needs to those of their shareholders:

“Their [defense contractors] motivations are different in some ways than ours [because] [t]he Pentagon represents war-fighters and taxpayers, and companies are representing shareholders . . . .”

Of course publicly-owned companies represent their shareholders, Mr. Lambert. They have a fiduciary duty to represent the interests of those people who provide the capital needed to operate the companies. And if they do not do so, your SEC comes knocking on their doors. But let’s not get carried away with some Ivory Tower fantasy about DOD’s imperviousness to financial pressures in weighing the needs of the war-fighters against the interests of those who provide the capital to DOD to run its enterprise – the Congress. Time and again, DOD has been vocal about its need to jettison programs, requirements and capabilities needed by the war-fighter because of financial concerns. So, sir, look in the mirror before you level that criticism at anyone else. Moreover, spend a little time talking to the men and women who provide your Department with the technology and instruments through which you implement your national defense policies. Other than those who have spilled their blood, faced hostile fire, or hold close the memories of loved ones who gave what Abraham Lincoln called the “last full measure of devotion” to their country, you will not find a more dedicated or patriotic constituency, nor one more committed to the men and women who defend us.

Here’s a tip. If you want to eliminate the delays in procurement that are occasioned by the bid protest process, Mr. Lambert, read and take to heart Luke 4:23 -- “Physician, heal thyself.” The single most important reason for delay of support to the war-fighter is DOD’s inability to define its requirements in a timely manner and then move in an equally timely manner to acquire the supplies and services identified in compliance with the law and the regulations. Keep your own house in order and you will not have to worry about a “record” number of bid protests. And, by the way, you will be serving the needs of the war-fighters and taxpayers far more effectively than you now are. Wars should be conducted against terrorists, not our contractors.

Authored by:

John W. Chierichella
(202) 218-6878
jchierichella@sheppardmullin.com

and

W. Bruce Shirk
(202) 741-8426
bshirk@sheppardmullin.com

GAO Sides with Foreign Military Sales Program Contractors in Dispute Over Protest Costs

Sheppard Mullin — Tue, 08 Dec 2009 12:46:33 -0800

Contractors engaged in procurements under the Foreign Military Sales ("FMS") program can breathe a little easier after a Government Accountability Office ("GAO") ruling on November 5, 2009, in which the GAO denied the U.S. Army Material Command's ("Army's") assertion that a contractor is not entitled to reimbursement for its protest costs associated with an FMS procurement protest. In Alsalam Aircraft Company, B-401298.3, the GAO found that FMS trust funds have the "character of appropriated funds" and that the Arms Export Control Act, which authorizes the FMS program, allows for use of appropriated funds in an FMS procurement and provides for recovery of protest costs from the FMS customer.

The FMS program facilitates the sale of U.S. arms, defense equipment, defense services, and military training to foreign governments. Under the program, a foreign customer may request price and availability data for U.S. military products and, if the foreign customer is deemed eligible, execute a letter of offer and acceptance ("LOA") with the U.S. Government. Once the agreement is finalized, the Department of Defense ("DOD") serves much like a "purchasing agent" acting on behalf of the customer country in acquiring the identified products from the U.S. government contractor, administering the procurement, and frequently providing product support and training. Foreign governments often favor the FMS program over other U.S. military direct sales programs because FMS generally provides products and services at a lower cost and at greater convenience due to the fact that the DOD oversees the entire procurement.

Following the Army's award of a contract for support services for the Royal Saudi Land Forces Aviation Command, Alsalam Aircraft Company ("Alsalam") filed a protest in which the GAO determined that the Army unduly delayed taking corrective action in the face of the contractor's clearly meritorious protest. The agency waited to take corrective action until after the due date for the agency report responding to the protest. As a result, Alsalam would normally be entitled to reimbursement for its protest costs under the Competition in Contracting Act of 1984 ("CICA"). 31 U.S.C. § 3554(c)(1)(A) (2006).

The Army argued that reimbursement was not appropriate in this case because GAO jurisdiction is dependent upon the availability of appropriated funds and an FMS procurement does not involve funds appropriated by Congress, but, rather, involves funds deposited into a trust account by the customer country. Additionally, the Army argued that the Arms Export Control Act bars the use of appropriated funds for costs associated with an FMS procurement because the DOD Financial Management Regulation ("FMR") mandates that "[f]unds appropriated by the Congress for defense purposes cannot be used to liquidate obligations resulting from the use of FMS contracting authority." DOD FMR, Vol. 15, sect. 030203. Therefore, funds appropriated to the agency would not be an appropriate source from which to reimburse Alsalam for its protest costs.

The GAO rejected each of the agency's arguments, reinforcing a prior opinion which classified funds in an FMS trust account as analogous to appropriated funds and pointing to selected Arms Export Control Act provisions that provide for the use of appropriated funds under certain circumstances in an FMS procurement. Procurements Involving Foreign Military Sales, B-165731, Nov. 16, 1978, 78-2 CPD ¶ 349. Because the Arms Export Control Act allows the U.S. Government to make payments under an FMS procurement when the President deems specified requirements are met or certain costs or fees should be waived, the GAO found the Army's "underlying premise" that the Arms Export Control Act bars the use of appropriated funds in connection with an FMS procurement to be fundamentally flawed. 22 U.S.C. §§ 2762(b); 2761(e)(3)(B). As such, the GAO emphasized that the Arms Export Control Act does not impose a barrier categorically restricting the use of appropriated funds in an FMS procurement.

Finally, even if the DOD FMR is interpreted to disallow reimbursement of protest costs from appropriated funds, the GAO determined that a protester may be reimbursed by funds obtained from the customer country. Although the Army indicated its understanding that funds should be collected from the customer country at the outset of the procurement rather than obtained in installments, the GAO cited the Arms Export Control Act and several DOD regulations which "make clear that the U.S. government can recover costs incurred in the procurement, even when funds are not collected in advance." These regulations permit modifications to an LOA, provide for quarterly billing of FMS customers, as well as a final billing statement listing any additional charges, and maintain that the customer country shall take responsibility for the full value of an FMS procurement. DOD Instruction 5105.38-M (SAMM) ¶ C4.6.10; DOD FMR, Vol. 15, sections 080201-02; 22 U.S.C. § 2762(a).

Based on its decision, the GAO recommended that the Army reimburse Alsalam for its protest costs and attorneys' fees, as dictated by the CICA. The GAO directed the Army to determine whether to utilize appropriated funds or monies requested directly from the customer country as the initial source of the funding.

Authored By:

Townsend L. Bourne
(202) 469-4917
tbourne@sheppardmullin.com

The "Franken Amendment": A Blow to Arbitration and Increased Litigation and Compliance For Government Contractors

Sheppard Mullin — Tue, 08 Dec 2009 12:44:55 -0800

In October, the United States Senate, by a 68-30 vote, approved an amendment to the Department of Defense (“DoD”) appropriations bill for fiscal year 2010 which prohibits the use of appropriated funds, if such funds are to be paid to any contractor or subcontractor, at any tier, which requires its employees or independent contractors to resolve certain claims through arbitration. The amendment, which passed despite DoD objections, was introduced by Sen. Al Franken (D-MN) (the “Franken Amendment”).

The impetus for the Franken Amendment was the story of Jamie Leigh Jones, a former employee of KBR, who alleges that seven KBR employees drugged her and gang-raped her in 2005 at Camp Hope in Baghdad, Iraq.

Ms. Jones filed a lawsuit in 2007 against KBR, its related entities, and its former parent company, Halliburton. Pursuant to Ms. Jones’ employment agreement, KBR sought to compel arbitration. In May 2008, the United States District Court for the Southern District of Texas, in a case titled Jones v. Halliburton Co., 625 F. Supp. 2d 339 (S.D. Tex. 2008), while holding that the mandatory arbitration provision was valid, found that several of Ms. Jones’ claims were outside of the scope of that provision, and therefore, not subject to mandatory arbitration. The four claims which the Court found to be outside the scope of the provision were: vicarious liability for assault and battery, intentional infliction of emotional distress; negligent hiring, retention, and supervision; and false imprisonment.

In September 2009, the United States Court of Appeals for the Fifth Circuit affirmed that holding in Jones v. Halliburton Co., 583 F.3d 228 (5th Cir. 2009). The Fifth Circuit held that the District Court was correct in determining that the claims listed above were outside the scope of the arbitration clause because “in most circumstances, a sexual assault is independent of an employment relationship.” The Court held that the factors supporting the conclusion that this was such an occurrence were that: “(1) Jones was sexually assaulted by several Halliburton/KBR employees in her bedroom, after-hours, (2) while she was off-duty, (3) following a social gathering outside of her barracks, (4) which was some distance from where she worked, (5) at which social gathering several co-workers had been drinking (which, notably, at the time was only allowed in ‘non-work’ spaces).”

Prior to its passage, Ms. Jones testified before the Senate Committee on the Judiciary regarding the Franken Amendment. As a result, the Franken Amendment received significant media attention because it was reported that it was designed solely to prohibit Federal contractors from requiring their employees to arbitrate sexual assault claims. This is not the case.

In fact, while sexual assault claims are among the categories of claims of which the Franken Amendment prohibits mandatory arbitration, it also prohibits mandatory arbitration of any claims related to or arising out of sexual assault or harassment, including: assault and battery; intentional infliction of emotional distress; false imprisonment; and negligent, hiring, supervision, or retention. And no payment of appropriated funds can be made to a contractor or subcontractor who violates the prohibition.

The Franken Amendment also prohibits the payment of appropriated funds to contractors and subcontractors who require mandatory arbitration for any claims under Title VII of the Civil Rights Act of 1964, which incorporates claims of discrimination on the basis of race, color, religion, sex, or national origin. Thus, the scope of the amendment is significantly broader than that which has been reported in the media.

DoD opposed the amendment in a message to Congress on October 6 stating that “[t]he Department of Defense, the prime contractor, and higher tier subcontractors may not be in a position to know about such things. Enforcement would be problematic, especially in cases where privity of contract does not exist between parties within the supply chain that supports a contract.” Such niceties as lack of privity and difficulties of enforcement are not likely to dissuade enforcement officials from asserting that requests for payment by a contractor based on invoices submitted by noncompliant subcontractors/vendors in the supply chain result in false claims. And even if they do, it will not take long for the plaintiff’s counsel to invoke the qui tam provisions of the FCA to increase their bargaining leverage with contractors.

The appropriations bill is currently awaiting conference negotiations between the House and Senate to reconcile different versions of the bill. The fate of the Franken Amendment is in question. Sen. Daniel Inouye (D-HI), Chairman of the Senate Committee on Appropriations, it is understood, is considering removing or modifying it.

If the amendment is included in the final bill, DoD contractors and subcontractors who currently have arbitration provisions likely will be required to sign new arbitration agreements with their employees in order to exclude the claims covered by the Franken Amendment. They also may be required to investigate the compliance of their subcontractors and vendors with the new law. Those businesses who are not currently engaged in DoD contracting (and subcontracting) but have an eye towards doing so, may wish to take the potential costs of litigation, compared to arbitration, into account when they do a cost-benefit analysis.

If the Franken Amendment does take effect, Federal contractors and subcontractors could be faced with the prospect of litigating certain types of employee claims which would previously have been the subject to arbitration including:

Sexual harassment claims
Sexual or racial discrimination claims in areas such as:
- Promotions
- Terminations
- Scheduling

However, other common employment claims may still properly be within the scope of arbitration clauses (provided that the basis of the claim is not discrimination of a protected class under Title VII, such as racial or sexual discrimination), such as:

Wage and hour claims
Whistleblower retaliation claims
Routine wrongful termination claims

Authored By:

Richard Siegel
(202) 772-5392
rsiegel@sheppardmullin.com

Federal Circuit Affirms, Requires Showing of Benefit to the Government for Allocability of Development Costs

Sheppard Mullin — Tue, 08 Dec 2009 12:42:26 -0800

In Teknowledge Corp. v. U.S., Fed. Cir., No. 2009-5053, 11/03/09, the U.S. Court of Appeals for the Federal Circuit affirmed a decision by the Court of Federal Claims (COFC) that software development costs were not allocable to the Government because the Government did not receive a benefit from the costs. Earlier this year we wrote about the potential implications of the COFC's decision.

On appeal, Teknowledge argued that the COFC erred in requiring it to demonstrate a benefit to the Government from the development of its TekPortal software. It argued that allocability may be determined by the costs' potential future benefit to the Government. Since its costs were "indirect" rather than "direct" costs, Teknowledge argued that the COFC improperly looked for a nexus between the costs and a specific government contract.

The Federal Circuit disagreed with Teknowledge and focused on its decision in Boeing N. Am., Inc. v. Roche, 298 F.3d 1274 (Fed. Cir. 2002), which emphasized that "benefit," as used in FAR Part 31.201-4, required a contractor to show a nexus between the contractor's cost and the contractor's government work. Here, the development costs resulted from work done in anticipation of acquiring government contracts. Since Teknowledge could not point to any specific government contract for the development or use of its TekPortal software, the required nexus did not exist. The court found any benefit of the costs to the Government to be remote and insubstantial.

In our previous posting on the COFC decision, we discussed the implications of the case on independent research and development (IR&D) costs. In these cases, both the COFC and Federal Circuit found a lack of benefit to the Government, in large part, because of the absence of a government contract. However, IR&D costs by their nature are not tied to a specific contract. Under FAR Part 31.205-18, IR&D "does not include the costs of effort sponsored by a grant or required in the performance of a contract." Similar to the COFC decision, the Federal Circuit makes no mention of IR&D. Indeed, there is no evidence to suggest that Teknowledge even considered using the FAR's IR&D provisions to characterize the development costs. Nevertheless, until further clarification from the courts, these two cases have the potential to negatively hang over IR&D projects.

The Federal Circuit's full opinion is available here.

Authored By:

Christopher Noon
(202) 469-4918
cnoon@sheppardmullin.com

Proposed FAR Rule Places Greater Responsibility on Contractors to Eliminate Personal Conflicts of Interest

Sheppard Mullin — Tue, 08 Dec 2009 12:40:32 -0800

Under the terms of a proposed FAR rule issued November 13, contractors that perform systems engineering and technical assistance ("SETA") type work for Government agencies soon will face enhanced obligations to prevent personal conflicts of interest on the part of their employees. The proposed rule applies to all contractors with covered employees who perform acquisition functions "closely associated with inherently Government functions" such as planning acquisitions, evaluating contract proposals, and awarding Government contracts.

For SETA firms and other contractors "embedded" in Agency acquisition departments, the proposed rule demands proactive steps to identify and prevent personal conflicts of interest. Under the rule, a contractor would be required to:

Screen covered employees for potential personal conflicts of interest by establishing procedures that include obtaining financial disclosure statements and updating the statement every year or whenever a new personal conflict of interest arises;
Prohibit covered employees from performing any contractual task that would create a personal conflict of interest, unless the conflict can be prevented or mitigated in consultation with the contracting agency;
Obtain a signed non-disclosure agreement to prohibit disclosure of non-public Government information;
Prohibit use of non-public Government information for personal gain; and
Inform covered employees of their obligation to disclose changes in personal or financial circumstances, avoid using non-public Government information for personal gain, and prevent even the appearance of personal conflicts of interest.

The Government's remedies for a contractor's noncompliance with these requirements range in severity from loss of contract payments or award fees to termination for default and suspension or debarment. As written, the proposed rule casts a wide net by defining "covered employees" to include subcontractors, consultants, and partners, along with sole proprietors.

Along with strong internal controls aimed at identifying and preventing personal conflicts of interest, the proposed rule would require ongoing vigilance by contractors to verify compliance and impose appropriate disciplinary action where needed. Significantly, the proposed rule would also require contractors to report to the contracting officer any violation of personal conflict of interest requirements by their covered employees. In "exceptional circumstances," the rule allows the contractor to resolve a personal conflict of interest by mitigating the conflict; however, any mitigation plan can be implemented only with written authorization from the head of the contracting activity.

The proposed FAR rule comes at a time of heightened scrutiny for contractors that help Government agencies plan acquisitions and administer contracts. In March 2008, GAO reviewed conflict of interest policies at various Department of Defense acquisition offices with blended public/private workforces. Based on its review, GAO recommended that contractor employees should be held to similar conflict of interest requirements as their Government counterparts. In light of GAO's recommendations, Congress inserted a provision in the 2009 Defense Authorization Act requiring the Office of Federal Procurement Policy to issue a standard policy to prevent personal conflicts of interest by contractor employees performing various federal acquisition functions. OFPP and the FAR Councils crafted the proposed FAR rule to fulfill that statutory mandate.

Comments on the proposed rule are due at the FAR Secretariat by January 12, 2010.

Authored by:

Jesse J. Williams
(202) 218-0028
jwilliams@sheppardmullin.com