Government Contracts, Investigations & International Trade Blog

Another U.S. District Court Follows The Lead Of The D.C. Circuit In Addressing The "First-To-File Bar" Circuit Split And Pushes Back Against An Opportunistic Relator

Sheppard Mullin — Mon, 14 May 2012 11:25:56 -0800

By Christopher Loveland and Jonathan Aronie

While the False Claims Act (“FCA”) generally is understood to be a “whistleblower” statute, it has been a tool of choice in recent years for opportunistic qui tam relators who lack any inside information regarding the very companies they sue. Not surprisingly, this lack of inside information has resulted in many qui tam cases being dismissed either because they merely mimic the allegations of a previously-filed case or do not plead their allegations of fraud with sufficient particularity.

A very recent example of this trend is United States ex rel. Sandager v. Dell Marketing, L.P., C.A. No. 08-4805, 2012 U.S. Dist. LEXIS 59714 (D. Minn. Apr. 25, 2012).[1] In that case, the relator, Bryan Sandager, filed suit against nineteen information technology (“IT”) government contractors in the U.S. District Court for the District of Minnesota alleging that they violated the FCA by misrepresenting the country of origin of products that were sold to the government through the GSA Advantage! website. Nowhere in his complaint or amended complaint did Sandager allege – let alone intimate – that he had any inside knowledge or information regarding any of the defendants. Instead, he based his allegations entirely on publicly available information that he had gleaned “through his long-held position in the industry.” Sandager had worked as a corporate compliance officer at one of the defendants’ competitors.

The defendants moved to dismiss on several grounds. First, in an issue of first impression in the Eighth Circuit, nine of the defendants argued that the case should be dismissed pursuant to the so-called “first-to-file bar,” 31 U.S.C. § 3730(b)(5), because Sandager’s allegations were based on the same underlying fraudulent conduct as earlier-filed qui tam suits that were pending when Sandager filed his action, and his claims did not give rise to a separate and distinct recovery by the Government. The relator contended that the first-to-file bar was inapplicable because the IT products at issue in his action were different from the IT products in the first-filed cases. The court disagreed, noting that “[u]ltimately, the question is whether the Government has sufficient notice of the fraudulent scheme through the first-filed complaint.” The court found the previously-filed cases provided the government sufficient notice to uncover the same facts alleged by Sandager and “the product distinction is immaterial because the fraudulent scheme alleged [by Sandager] is in material respects the same as alleged” in the prior cases.

The court also addressed the Circuit Court split regarding whether a procedural dismissal of a first-filed case precluded application of the first-to-file bar. Citing to the Sixth Circuit Decision in Walburn v. Lockheed Martin Corp., 431 F.3d 966 (6th Cir. 2005), the relator contended that the first-to-file bar did not apply because, as to most of the defendants, the previously-filed cases had been dismissed on procedural grounds. The defendants urged the court instead to follow the standard enunciated by the D.C. Circuit Court of Appeals in United States ex rel. Batiste v. SLM Corp., 659 F.3d 1204, 1209 (D.C. Cir. 2011), which held that the plain language of the statutory text mandates that “as long as a first-filed complaint remains pending, no related complaint may be filed.” Thus, because the earlier-filed qui tam suits were pending at the time that Sandager filed his action, the plain language of the first-to-file bar mandated that the amended complaint be dismissed. The court agreed with the defendants and followed Batiste, noting that “Walburn has been criticized and distinguished.”

All nineteen of the defendants also argued that the amended complaint should be dismissed because it contained only conclusory allegations, and failed to plead the “who, what, when, where, and how” of alleged fraud as required by Fed. R. Civ. P. 9(b). For example, the amended complaint did not include details regarding any sales that allegedly violated the FCA, including “the precise Government purchasing agency, the exact purchase order, the price of the goods sold, and the amount the Government paid for the goods.”

The defendants also argued that “in no instance does [the relator] provide any details as to when and, more importantly, if the Defendant actually sold non-conforming products to the Government.” In response, Sandager contended that he did not need to allege details regarding actual sales. Instead, because products allegedly were “offered for sale . . . the ‘logical conclusion’ is that actual sales occurred.” In addition, because he alleged a scheme extending over a long period, Sandager contended that he was not required to “allege the specific details of every fraudulent claim.”

The court recognized that Sandager is not required to allege the details of each and every fraudulent claim. However, he is required “to plead at least one representative example of an actual false claim.” The court noted that “[t]here is abundant caselaw in support of the court’s conclusion that Sandager’s failure to allege—and acknowledged inability to allege—actual sales is fatal to his claims.”

Each of the Defendants sought dismissal of the amended complaint with prejudice on futility grounds, while the relator requested 30 days to seek leave to file a second amended complaint. The court again sided with the defendants. It did not believe that Sandager could resolve the “fundamental flaws” in his amended complaint simply by re-pleading. Nor would discovery be appropriate as it “would contradict the FCA’s purpose and procedure.” Accordingly, the court dismissed the action with prejudice.

The court’s ruling in Sandager was in line with the holdings of several other courts that recently have addressed similar situations where an opportunistic relator either alleges the same fraudulent scheme as a previously-filed action or fails to plead with particularity even one example of a false claim. Relators cannot avoid the first-to-file bar merely by alleging sales of different products if the government already had notice of the same underlying scheme based on allegations in an earlier-filed case; nor is it enough for a relator merely to allege a theory or methodology as to how a company could have violated the False Claims. Instead, compliance with Rule 9(b) mandates that specific details be alleged by a relator showing the “who, what, when, where, and how” of the alleged fraud. Were courts to hold otherwise, it would open the floodgates of baseless lawsuits by opportunistic relators and cause companies to needlessly incur significant resources fending off countless discovery fishing expeditions.

[1] In the interest of full disclosure, Sheppard Mullin represented three of the defendants in this matter. Christopher Loveland and Jonathan Aronie were lead counsel.

Avoiding "Embarrassment" In Contract Disputes Act Litigation: Routine vs. Non-Routine Requests For Payment

Sheppard Mullin — Mon, 14 May 2012 11:24:30 -0800

By Christopher E. Hale

Contractors pursuing claims against the government under the Contract Disputes Act (“CDA”) can often fall victim to the jurisdictional pitfalls of the Act from the very start of the claims process, i.e., with the claim itself. After a contracting officer denies a claim under the CDA, a contractor can appeal the decision to either a Board of Contracts Appeals or the U.S. Court of Federal Claims. However, there is no shortage of cases in which such appeals are dismissed for lack of jurisdiction because the original requests for payment did not constitute “claims” under the CDA.

One recent illustration of this problem involved the distinction between routine and non-routine requests for payment, as addressed by a recent split-panel decision of the United States Court of Appeals for the Federal Circuit, Parsons Global Services, Inc. v. Secretary of the Army, No. 2011-1201 (Fed. Cir. Apr. 20, 2012).

The case centered on the termination for convenience of several task orders under an indefinite-delivery-indefinite quantity contract awarded by the Army to Parsons for design-build work in Iraq. Parsons had entered into a subcontract with Odell International, Inc. (“Odell”) to construct health care facilities and deliver medical equipment in Iraq pursuant to the prime contract.

Shortly before the task orders were terminated for convenience by the Government, the Defense Contract Audit Agency (“DCAA”) determined that Odell had been mistakenly billing Parsons using a lower overhead rate than was specified in the subcontract. Odell then invoiced Parsons for the difference, but Parsons refused to pay the invoice and submitted a termination settlement proposal to the Termination Contracting Officer (“TCO”) without including the disputed Odell costs. Two years later, as part of settlement of the prime contract, DCAA audited Parsons' billed costs, including Odell's costs, and determined that Odell's costs at the higher overhead rate were supported and appropriate. Odell submitted a new invoice for the difference, and Parsons submitted three payment requests for the additional Odell costs to be paid directly by government. The TCO declined to act on the requests to settle directly with Odell. Parsons then submitted a sponsored “Certified Claim for Payment” under the CDA on behalf of Odell to the Procurement Contracting Officer (“PCO”), and appealed the PCO's denial of the claim to the Armed Services Board of Contract Appeals (“ASBCA”).

The Government moved to dismiss for lack of jurisdiction, arguing that Parsons' routine request for payment to the PCO did not amount to a claim under the CDA. Parsons countered that, because its requests for payment occurred two years after the termination of the task orders and thus could not be subject to routine invoicing and termination procedures, the request was non-routine and sufficient by itself to constitute a claim. The ASBCA sided with the Government and dismissed the claim.

On appeal, the Federal Circuit affirmed the ASBCA's decision, holding that Parsons' request for payment was not a claim as defined in FAR 2.101. Under the FAR, demands for payment can be classified as either “routine” or “non-routine.” If the request is “non-routine,” then it constitutes a claim under the CDA so long as “it be (1) a written demand, (2) seeking, as a matter of right, (3) the payment of money in a sum certain.” However, if the request is “routine,” a pre-existing dispute is necessary for it to constitute a claim under the CDA.

As the Federal Circuit detailed, non-routine requests for payment typically spring from additional or unforeseen costs not covered by the contract:

Such requests include requests for equitable adjustments for costs incurred from “government modification of the contract, differing site conditions, defective or late-delivered government property or issuance of a stop work order” and other government-ordered changes; for damages resulting from the government's termination for convenience and termination settlement proposals that have reached an impasse; for compensation for additional work not contemplated by the contract but demanded by the government; for the return of contractor property in the government's possession; and for damages stemming from the government's breach of contract or cardinal change to the contract.

In contrast, according to the Federal Circuit, the request for payment of Odell's costs made to the PCO was routine because the costs were explicitly covered by the contract and, but for the billing error, would have been subject to routine invoicing during contract performance. Furthermore, the routine request was not subject to a pre-existing dispute because the PCO, the appropriate official to evaluate the request, never received a proper request for payment prior to the improper “Certified Claim for Payment.”

In a somewhat scathing dissent, Judge Newman posited that major billing errors, such as Odell's, are neither foreseen nor intended and cannot be characterized as routine. However, stepping away from the esoteric classification of routine and non-routine requests for payment, Judge Newman threw the facts of the case – in which “a simple correction of a billing error has morphed into a nearly four-year litigation, with no end in sight” – into sharp relief:

The agency's refusal to pay Parson's claim, having acknowledged the obligation and having audited it through its own Audit Agency, is contrary to the guiding principle that “The Federal Acquisition System will [c]onduct business with integrity, fairness, and openness.” . . . . This lengthy litigation of a conceded governmental obligation is an embarrassment.

To avoid being caught in such an “embarrassment,” contractors should take care when submitting claims pursuant to the CDA to ensure that a request for payment that could be classified as routine is subject to a pre-existing dispute. Otherwise, the contractor might find years later that its claims process was flawed from the start and must begin anew – assuming the statute of limitations has not already run its course.

FCPA Industry Sweep Strikes Hollywood

Sheppard Mullin — Mon, 14 May 2012 11:23:46 -0800

By John M. Hynes

In the past, we have reported on a number of Foreign Corrupt Practices Act ("FCPA") developments and have furnished subscribers with a primer on the FCPA. The latest developments in this area relate to an investigation of the motion picture industry and its activities in China.

On April 26, 2012, Reuters reported that the US Securities and Exchange Commission ("SEC") recently sent letters of inquiry to several prominent movie studios seeking information about their dealings in China that may constitute violations of the FCPA. Later reports indicate that the letters were sent to Twentieth Century Fox, Paramount Pictures, Sony Pictures, Universal Pictures, Walt Disney Studios, Warner Bros., and Dreamworks Animation.

Background of the SEC Inquiry

While the specific nature of the alleged improper payments has not been disclosed, the SEC letters of inquiry reportedly focus on potential unlawful payments to the state-owned China Film Group ("CFG"), which has historically controlled the Chinese film market. The CFG, however, has denied any involvement in the inquiry.

This inquiry comes at a time when the Chinese film industry is booming. In 2011, Chinese box office revenue grew about 35% to $2.1 billion, most of which was generated by 3D films. On the heels of this growth, in February 2012, the CFG eased restrictions on the entry of foreign films into China, exempting 14 premium format films (e.g., 3D films) from the limit of 20 foreign films per year. Perhaps not coincidentally, the CFG passed these relaxed restrictions soon after China's Vice President, Xi Jinping, visited Washington, DC and Los Angeles in February 2012.

Hollywood studios have taken advantage of the growing Chinese film industry, inking a wave of deals both before and after the CFG eased its foreign film restrictions. For example, in 2011, Dreamworks' Kung Fu Panda was the highest grossing animated movie in China, raking in about $100 million in box office sales. Moreover, in February 2012, Dreamworks announced its plan to build a production studio in Shanghai with some of the largest media firms in China. Disney has also taken advantage of the favorable film industry climate in China, recently announcing that the next Iron Man film will be co-produced in China pursuant to an agreement among Disney, its Marvel Studios unit, and China's DMG Entertainment.

FCPA Industry Sweeps

This inquiry is the latest in a series of so-called "industry sweeps" conducted by US regulators designed to root out potential FCPA violations across particular business sectors. The SEC and Department of Justice ("DOJ") have been known to launch wide-ranging FCPA investigations into multiple companies when they have reason to believe that the alleged conduct represents a pattern or practice within the industry. Because industry sweeps are often triggered by perceived wrongdoing within only one particular company, the Government may investigate companies without any evidence or specific allegations of wrongdoing.

Over the past decade, the U.S. Government has devoted significant resources to FCPA industry sweeps. For example, the SEC recently launched inquiries into at least 10 financial services firms regarding whether they made improper payments in seeking investments from sovereign wealth funds. The SEC and DOJ have also recently been conducting FCPA investigations into various pharmaceutical and medical device companies, including Johnson & Johnson, Pfizer, and Merck. Johnson & Johnson agreed to pay $70 million to settle the allegations against it. Additionally, in 2007, the SEC and DOJ began launching FCPA investigations involving at least seven oil and gas companies, including Panalpina World Transport and Transocean, resulting in more than $230 million in disgorgement, fines, and penalties.

FCPA Enforcement Activity Leading Up to Movie Industry Sweep

The movie industry sweep comes as no surprise to many due to recent FCPA enforcement activity involving the film industry and the Government's longstanding focus on potential FCPA issues in China. In September 2009, a federal jury in Los Angeles convicted two Hollywood film executives – Gerald and Patricia Green – of substantive FCPA violations and conspiracy to violate the FCPA for paying approximately $1.8 million in bribes to the former governor of the Tourism Authority of Thailand in exchange for contracts to operate the annual Bangkok International Film Festival worth more than $13.5 million. Both executives were sentenced to six months in prison.

Additionally, while the growing Chinese economy offers a wealth of opportunities for American businesses, China has long been a primary focus of the U.S. Government's FCPA enforcement efforts. The prevalence of state-controlled entities coupled with widespread corruption and questionable business traditions makes China an FCPA trap for unwary American businesses. Indeed, between 2006 and 2011, about 9% of all FCPA enforcement actions involved activity in China.

What this All Means for Companies in the Film Industry

The SEC's strategy in sending letters of inquiry to multiple movie studios suggests that it is taking an industry-wide approach to this matter. As such, companies and individuals across the entire film industry could be at risk and should react accordingly. This risk is not limited to major movie studios, as the FCPA applies to a broad range of entities and individuals. Indeed, the recent uptick in FCPA enforcement actions against individuals, including the convictions of two film executives discussed above, suggests that the Government may eventually seek FCPA charges against individuals involved in the alleged illegal activity as well as the companies. In addition to disgorgement, fines, and penalties faced by both individuals and companies, individuals can face lengthy prison sentences for violating the FCPA.

Companies can take various steps to ensure that they are prepared if and when the Government comes knocking on their door. While it is always advisable to have a robust and effective FCPA compliance program in place, it is even more important now for companies in the film industry to ensure that their compliance programs are up-to-date and being properly implemented so that they can gain credit if the Government launches an investigation. This is especially true for film companies with dealings in China, as these companies are on the SEC's radar. To this end, film companies should consider a privileged review of their FCPA compliance programs by outside counsel to ensure that they include all the components that the Government deems necessary, including anti-corruption policies and procedures, training and communication, third-party due diligence, anti-corruption contract clauses, internal accounting controls, auditing of program effectiveness, and response to improper conduct and remedial action.

At-risk companies should also consider a privileged internal review by counsel to determine whether any FCPA issues exist and, if so, decide whether to disclose the issues to the Government. While companies can earn cooperation credit for self-disclosing potential violations, the question of whether and what to voluntarily disclose to the Government is a complex decision involving both risks and rewards for the company. Irrespective of whether a disclosure is made, however, launching a preemptive internal review will allow the company to stay ahead of the Government and be best prepared in the event that the Government initiates its own inquiry.

The Federal Government Takes Aim at Medicare Fraud

Sheppard Mullin — Mon, 14 May 2012 11:22:09 -0800

By Joseph Barton

On May 2, 2012, Federal agents with the Department of Justice's (“DOJ”) special task force made the biggest Medicare bust in U.S. history, and a splash in the media, when it cracked down on a number of unrelated Medicare fraud schemes across the country that resulted in an alleged $450 million in false claims being submitted to Medicare over the past six years. A total of 107 people were arrested, including doctors, nurses, social workers, office managers, and patient recruiters. Charges ranged from submitting false billing for home healthcare, mental health services, HIV infusions, and physical therapy, to money laundering and receiving kickbacks.

With the President and Congress under pressure to ensure Medicare's fiscal sustainability, DOJ has committed itself to vigorously investigating and prosecuting Medicare fraud. The FBI currently has 500 agents and analysts investigating 2,600 cases of alleged healthcare fraud and has charged 1,300 people since 2007 for submitting false claims to Medicare. In addition, Lanny Breuer, the head of the DOJ's criminal division, has commented that the recent Medicare busts should serve as a reminder to health care providers that they “risk prosecution and prison time every time they submit a false claim.”

With the Federal Government taking aim at Medicare fraud, here are few things for which healthcare providers should be on the lookout:

Kickbacks: The federal Anti-Kickback Statute, 42 U.S.C. §1328-7b(b), prohibits any offer, payment, solicitation, or receipt of money, property, or remuneration to induce or reward the referral of patients or healthcare services payable by Medicare. These improper payments can come in many different forms, including: referral fees, finder’s fees, productivity bonuses, discounted leases, discounted equipment rentals, research grants, speaker’s fees, excessive compensation, and free or discounted travel or entertainment. Kickbacks can also constitute a violation of the federal False Claims Act (“FCA”), 31 U.S.C. §§ 3729-3733.
Up-Coding: Billing Medicare involves a complex series of codes that assign a dollar value to the procedures and services performed based on their complexity. Up-coding occurs when a claim is submitted for a more complex procedure than was actually performed. Up-coding is a favorite target of health care- related FCA claims.
Unbundling and Bundling: Medicare has special reimbursement rates for groups of procedures that are typically performed together, such as laboratory tests. “Unbundling” occurs when bundled procedures are billed separately in order to exceed the group reimbursement rate. Conversely, “bundling” refers to the artificial combination of tests and procedures in such a manner that they are not separately available, which results in the performance of and billing for unnecessary tests. Unbundling and bundling can constitute violations of the FCA.
False Certifications: When physicians, hospitals, and other health care providers submit bills to Medicare, they are required to include a number of certifications, including that the services were medically necessary, were actually performed, and were performed in accordance with all applicable rules and regulations. False certifications are easy prey for whistleblowers under the FCA.
Improper Financial Interests: The federal Stark law, 42 U.S.C. §§ 1395nn and 1396b, generally prohibits physicians and members of their immediate families from having financial interests in entities that perform certain designated health services to which they refer patients or from which they order goods and services paid for by Medicare.

By keeping an eye out for these types of practices, which are commonly targeted for Medicare fraud allegations, healthcare providers can avoid substantial liabilities.

The Sisyphean Task Of Dodd-Frank Rulemaking

Sheppard Mullin — Mon, 14 May 2012 11:20:24 -0800

By Anthony N. Moshirnia

Much has been written in this space and others regarding the Dodd–Frank Wall Street Reform and Consumer Protection Act (“Dodd-Frank Act”), and its likely and observed impact on the business and legal landscape (e.g., executive compensation, whistleblower incentives, and “conflict minerals”. Not least among the Act’s effects is its mandate for a large number of rulemakings across government regulatory bodies. In total, the Dodd-Frank Act mandated 398 different rulemakings from 20 different regulatory agencies. In some cases, the Act requires more than one agency to issue rules on the same topic. Congress also specified a rulemaking schedule that applies to most of the rules required under the Act. 275 of the required rulemakings carry Congressionally mandated deadlines or annual requirements.

So far, regulators’ ability to stick to this schedule has been underwhelming. As of May 1, 2012, a total of 221 Dodd-Frank rulemaking deadlines have passed. Regulators have only met 73 of those deadlines with finalized rules, a mere one-third of those required. Regulators failed to release even proposed rules for 21 of those 148 missed deadlines.

Indeed, of the total 398 rulemakings mandated by the Dodd-Frank Act, only 108 of them have been met with final rules. Regulators have proposed rules that would have met the requirement for 146 additional rulemakings – had they been finalized on schedule. No proposals have been made for the remaining 144 rulemakings, although the deadlines for some of them have not yet passed.

In light of the current rulemaking backlog, it appears that we may be waiting to assess the final impact of the Dodd-Frank Act for many months to come.

In the Tradition of Gilda Radner, the Court of Appeals for the Federal Circuit Proclaims "Never Mind" in Zoltek II

Sheppard Mullin — Mon, 16 Apr 2012 02:20:06 -0800

By Louis D. Victorino

The United States Court of Appeals for the Federal Circuit (CAFC) recently issued a so-called en banc (all judges of the court) decision with great importance to Federal Government contractors. In Zoltek Corp. v. United States, Fed. Cir., No. 2009-5135, March 14, 2012 ("Zoltek II"), the Court redefined the scope of the statute underlying the Federal Acquisition Regulation (FAR) "Authorization and Consent" clause, 28 U.S.C. §1498. In so doing, the Court confirmed Federal Government contractor immunity from patent infringement suits in instances where the patent infringement may have occurred in whole or in part outside of the United States. The more fundamental holding of the case was to reverse its own prior decision in the same case (“Zoltek I”), in which the CAFC had held that §1498 does not waive Federal Government patent immunity from certain patent infringements occurring in part outside the United States.

Zoltek Corporation (Zoltek), is a U.S. corporation headquartered in St. Louis, MO, and is the assignee of rights in a U.S. patent related to manufacturing processes and methods used for the production of carbon fiber sheets. Two types of fiber carbon products allegedly were manufactured through the use of methods covered by the Zoltek patent. The allegedly infringing resulting products were used by Lockheed Martin Corporation (Lockheed) in the manufacture of F-22 jet aircraft, designed and built, of course, under a U.S. Government contract. The carbon fiber products were manufactured from fiber carbon components in one instance manufactured in Japan and finished in the U.S. and in a second instance manufactured entirely in Japan and imported into the U.S.

In its original complaint, Zoltek sued the United States under 28 U.S.C. §1498(a) in the United States Court of Federal Claims (COFC) alleging, in relevant part, that its patent was infringed because the F-22 related carbon fiber products were used or manufactured by or for the U.S. without a license or other legal right. No claims were asserted against Lockheed. In relevant part, 28 U.S.C. §1498(a) provides:

(a) Whenever an invention described in and covered by a patent of the United States is used or manufactured by or for the United States without license of the owner thereof or lawful right to use or manufacture the same, the owner’s remedy shall be by action against the United States in the United States Court of Federal Claims for the recovery of his reasonable and entire compensation for such use and manufacture.

* * *

For the purposes of this section, the use or manufacture of an invention described in and covered by a patent of the United States by a contractor, a subcontractor, or any person, firm, or corporation for the Government and with the authorization or consent of the Government, shall be construed as use or manufacture for the United States.

The U.S. (Government) moved for summary judgment on this portion of the Zoltek lawsuit based on the language of sub-section (c) of 28 U.S.C. §1498. That sub-section provides, in total, "[t]he provisions of this section shall not apply to any claim arising in a foreign country." The Government argued that this section precluded recovery by Zoltek under its "methods" patent claims because some or all of the infringement occurred in Japan and, thus, arose "in a foreign country." The COFC held, in part, that §1498 did not waive Government's sovereign immunity to all infringements (direct infringements but not indirect infringements) but ultimately denied the Government's motion. Both parties appealed the court's decision on various grounds.

On appeal, the CAFC held, in its first decision in the Zoltek matter, that a "direct infringement" of a patent under 35 U.S.C. §271 was a predicate for Government liability under §1498(a). The CAFC further held that a "process" asserted to be covered by a method patent cannot give rise to an infringement "within" the United States unless each and every step of the process is performed in the U.S. Since some or all of the processes at issue in the litigation occurred in Japan, the §1498(a) remedy was not available. Zoltek Corp. v. United States, 442 F.3d 1345, 1350 (Fed. Cir. 2006) ("Zoltek I"). The CAFC did not address contractor patent infringement immunity under §1498(a). The case was remanded to the COFC for further proceedings. Id. at 1353.

On remand, Zoltek sought leave to amend its complaint to add an infringement claim against Lockheed based on 35 U.S.C. §271 and sought, further, to have the matter transferred to a federal district court in Georgia. The Government argued that §1498(a), while not waiving sovereign immunity for Zoltek's patent claims, nevertheless provided Lockheed immunity from Zoltek's suit and, therefore, there was no jurisdiction in the federal district court in Georgia. The COFC rejected the Government's arguments and found that it was in the interest of justice to transfer the case to Georgia. Subsequently, the COFC certified for appeal to the CAFC the issue of Lockheed immunity under §1498(a).

In considering the merits of the appeal, the CAFC came to a disturbing conclusion regarding the implications of its prior decision in Zoltek I. It stated the issue as follows:

In confronting the question of whether a contractor acting under Government authority could be held liable for patent infringement, in a situation in which we had previously held the Government not liable for the allegedly infringing actions of its contractor, we realized that one of two consequences would result. Either we had to conclude that a patentee’s well-pleaded complaint of infringement in the United States of a United States patent in these circumstances fails to state a cause of action against both the Government and the Government’s contractor, or we would have to override the long-standing understanding of the statutory framework that a contractor working for the Government is immune from individual liability for patent infringement occurring in the course of conducting the Government’s contract.

Zoltek II, at page 8.

The CAFC concluded, with one dissent, that neither of these options was acceptable and, instead, ruled to overturn its earlier decision in several respects. First, the Court ruled that the COFC and the CAFC's earlier decision had wrongly relied on case law to conclude that §1498(a) covered only direct infringements and not indirect infringements. The CAFC reviewed the prior case law relied upon in Zoltek I and found that statements used by the COFC to reach its decision regarding the scope of §1498(a) were dicta. Second, the CAFC found that unauthorized "sales" and "use" of products incorporating patented technology were indirect patent infringements falling within the coverage of §1498(a). Finally, the CAFC reversed its prior holding that all steps in a "process" or "method" patent must be infringed in the United States for §1498(a) to apply.

The practical result of Zoltek is that very few sales to the U.S. Government by contractors and subcontractors of products or services that infringe patents will not be covered by §1498(a). The Court's holding that indirect patent infringements are covered by §1498(a) largely achieves this result since §1498(a) states:

28 U.S.C. §1498(a) (emphasis added). This language, together with the Court's holding that not all processes in a process or method patent need be performed in the U.S., encompasses the overwhelming majority of patent infringement cases covered by §1498(a). If a product or service of a contractor is produced through the unauthorized use of a U.S. patent with the authorization and consent of the Government, any resulting patent infringement action must be brought against the Government in the United States Court of Federal Claims. This is, of course, the result that most government contractors believed to be the case prior to the Zoltek I decision.

Deciphering the Alphabet Soup - FAPIIS, CPARS, and PPIRS; Don't Look For All This In The FAR

Sheppard Mullin — Mon, 16 Apr 2012 02:19:25 -0800

By Bruce Shirk and David Gallacher

In March 2010, the U.S. Government rolled out a new tool promised to provide a centralized source for all publicly available contractor past performance and integrity information – the Federal Performance and Integrity Information System (“FAPIIS”). We have written multiple times about it (in June 2010, March 2011, and January 2012), including the importance of monitoring the information entered to ensure that past performance evaluations are accurate, complete, and fair, and also to prevent release of proprietary information to the public. But the system continues to evolve and, as contractors try to manage the information in FAPIIS, many companies find the process baffling due to (among other things) the multiplicity of modules within the system and the acronyms used to identify them. In fairness, government personnel tasked with implementing FAPIIS have developed on-line training to assist contractors in navigating this complex system. That said, not everyone involved in government contracting can or will take the training, but everyone does need a basic understanding of FAPIIS. So keep reading, because you won't find this information in the FAR.

“What's in a name?” – Understanding the Past Performance Databases

Let us begin with a review of the terminology, to assure that we understand the various acronyms and government IT systems. Generally speaking, the government has three primary systems or modules that contain past performance data:

Contractor Performance Assessment Reporting System (“CPARS”). For more than a decade, the government has used the CPARS module to centralize and harmonize past performance information. The main input for this system is a written “Report Card” issued by a Contracting Officer, which (in most circumstances) is called a Contractor Performance Assessment Report (“CPAR”), on which contractors have the opportunity to comment and which they can challenge. In this regard, note that multiple reports are commonly abbreviated as CPARs (little “s”), which is not to be confused with CPARS (capital “S”), which is the acronym identifying the database as a whole. The CPARS database is available to source selection officials government-wide, but it is not publicly available.
Past Performance Information Retrieval System (“PPIRS”). PPIRS is a companion system to CPARS. It receives the completed CPARS report cards, including contractor comments, as well as other statistical reports on smaller-value contracts. Additionally, PPIRS receives reports of “adverse actions” reported by the Contracting Officer, with the information available government-wide. The “adverse actions” include: (i) a non-responsibility determination; (ii) termination for cause; (iii) termination for default; (iv) defective pricing; (v) a determination of contractor fault; (vi) a determination that the recipient is not qualified; (vii) a termination for material failure to comply; and/or (viii) entry into an Administrative Agreement to resolve a suspension or debarment proceeding. These “adverse actions” are, with the exception noted in our January 2012 posting, eventually made available to the public via FAPIIS, but the balance of the information in PPIRS remains unavailable to the public.

The FAR, if read literally, would suggest that PPIRS contains only written past performance evaluations submitted pursuant to the requirement of FAR 42.1502 that “agencies shall prepare an evaluation of contractor performance” for certain types of contracts over the simplified acquisition threshold of $150,000 (with the Department of Defense having different and higher thresholds). Such information is indeed contained in PPIRS – but in a separate sub-module called PPIRS-RC (Report Card). Past performance information for contracts beneath the applicable dollar thresholds are contained in another PPIRS module – PPIRS-SR (Statistical Reporting), which collects quantifiable contractor past performance information regarding delivery, quality, etc., and uses sophisticated algorithms to compare the performance of comparable contractors and classify them accordingly. This past performance information is updated monthly and, like the information contained in PPIRS-RC, is accessible to contractors, who can review and challenge their classifications. Training on PPIRS is available at www.ppirs.gov.
Federal Performance and Integrity Information System. Created in 2008 by act of Congress (Pub. L. No. 110-417, Section 872), FAPIIS is, according to FAR 42.1503(f), a “module” of PPIRS, and includes publicly available information relating to a contractor's integrity, which is provided by both the government and the contractor. This information includes: (i) whether a contractor is included on the Excluded Parties List or has entered into an Administrative Agreement with an agency Suspension and Debarment authority; (ii) a statement as to whether a company has been the subject of a criminal, civil, or administrative proceeding that resulted in a conviction, a finding of fault, or an admission of liability relating to performance of a government contract in the past five years; and (iii) reports of government “adverse actions” (as reported by the Contracting Officer through CPARS).

At the risk of over-simplifying this confusing process, the graphic below illustrates generally how past performance information flows through the government systems and into FAPIIS.

“Clear As Mud”

The government appears to be aware of the confusion it has generated with its past performance "alphabet soup." To eliminate this confusion, the government has taken a number of steps:

In recent on-line instruction for CPARS, the government has attempted to distinguish more specifically between CPARS and FAPIIS, describing CPARS as hosting “a suite of web-enabled applications that are used to document contractor and grantee performance information that is required by … FAR Part 42 … [and] requires documenting additional contractor performance information in the Federal Awardee Performance & Integrity Information System (FAPIIS).”
In June 2011, the Government proposed amendments to the FAR “to require all past performance information be entered into the Contractor Performance Assessment Reporting System (CPARS), the Governmentwide past performance system” and to standardize the past performance evaluation criteria. See 76 Fed. Reg. 37704 (June 28, 2011). This rule could clarify that the government-wide past performance portal is “CPARS” – not “FAPIIS” – but absent an extensive re-education program (and a re-branding campaign for FAPIIS), we doubt that a simple rule change will effectively solve the confusion. The proposed CPARS revision (FAR Case 2009-042) is currently under review by DOD legal authorities, and we expect that a final rule will be issued soon.

Make Sure You Focus on More Than Just FAPIIS

While companies are encouraged to stay abreast of information posted in FAPIIS because such information is required to be made publicly available (as we previously discussed in our blog), focusing only on FAPIIS ignores the other part of the picture – the part that your government customers see and use to make their past performance evaluations.

Conclusion – And More to Come

Hopefully, we have managed to clarify (at least a little bit) your understanding of FAPIIS as a system and how it relates to the other past performance data repositories. In the coming months, we will follow up with additional postings discussing questions that we commonly receive from contractors in these regards, including: "Exactly what information must I report in FAPIIS?" "What must I certify with regard to FAPIIS?" and "What past performance information should I be monitoring, how and when, and what can I do about it?" Stay tuned.

Preventing Personal Conflicts Of Interest Among Contractor Employees Performing Acquisition Support Services

Sheppard Mullin — Mon, 16 Apr 2012 02:18:35 -0800

By Keith Szeliga and Franklin Turner

On December 2, 2011, Federal Acquisition Regulation Subpart 3.11 - Preventing Personal Conflicts of Interest for Contractor Employees Performing Acquisition Functions -- took effect. The new Rule imposes a host of compliance obligations on contractors, including the requirement to screen for and prevent personal conflicts of interest when supporting acquisition functions. The Rule also requires contractors to prohibit covered employees from utilizing non-public information for personal gain and to obtain from covered employees executed non-disclosure agreements prohibiting the dissemination of such information.

Two of our Government Contracts lawyers – Partner Keith Szeliga and Associate Franklin Turner – recently published a Briefing Paper that assists contractors in understanding the Rule and complying with its requirements.

Click here to view a PDF copy of the article.

Free Trade Agreement Updates - Changes to the WTO GPA and KORUS FTA

Sheppard Mullin — Mon, 16 Apr 2012 02:16:58 -0800

By David Gallacher

In December 2011 the World Trade Organization reached an agreement in principle to implement “historic revisions” to the World Trade Organization Government Procurement Agreement (WTO GPA), a trade agreement covering the public procurement markets in more than 40 WTO member states (including the United States). On March 30, 2012, the WTO GPA formally adopted these revisions. While the updates have been formally agreed upon, it may take months until two-thirds of the signatory countries ratify the agreement and make the changes official. Nevertheless, the international community appears to be moving forward with plans to implement, pending ratification.

Separately, under the recently ratified the U.S./South Korea (“KORUS”) Free Trade Agreement (“FTA”), the U.S. Government has waived South Korea's obligations to follow the WTO GPA, to which South Korea has been a signatory since January 1997. KORUS offers greater benefits to U.S. companies in the Korean procurement space compared to the WTO GPA, and where those benefits apply KORUS will, of course, take precedence over the WTO GPA. Toward this end, numerous interim rules have recently been issued to update the Federal Acquisition Regulation, recognizing the new KORUS FTA and reducing the applicable dollar thresholds for purchasing supplies and services from South Korean sources.

This blog posting provides a brief summary of some of these new changes to the WTO GPA and the KORUS FTA.

Updates to the WTO GPA

Generally, the updated WTO GPA changes the prior Agreement in two major ways – through expanded scope and improved flexibility.

Expanded Scope. The Government estimates that the expanded scope will improve access to approximately $80-$100 billion in U.S. and foreign procurement markets. In this regard, the new Agreement:

Expands coverage to include approximately twelve U.S. executive agencies that were not previously covered by the Agreement (e.g., the Social Security Administration, the Advisory Council on Historic Preservation, the Court Service and Offender Supervision Agency for the District of Colombia, the Federal Energy Regulatory Commission, the Federal Labor Relations Authority, the Millennium Challenge Corporation, the National Assessment Governing Board, the National Endowment for the Arts, the National Endowment for the Humanities, the U.S. Marine Mammal Commission, and the United States Access Board);
Allows access to additional central-government entities (estimated at 150-200) in a number of foreign countries such as European Union nations, Aruba, Hong Kong, Israel, Liechtenstein, South Korea, and Switzerland;
Enhances coverage for sub-central entities (such as state, local, regional or provincial governments), particularly those located in Canada, which have historically been exempted from the GPA (this follows an agreement reached between the U.S. and Canada in February 2010 that liberalized access to sub-central entities that were not previously covered by the GPA);
Offers full coverage for construction contracts;
Expands the scope of specific categories of products that are covered by the GPA; and
Gives flexibility for countries further to reduce the applicable dollar thresholds (currently set at $202,000 for purchases of supplies/services by the U.S. Government).

Improved Flexibility. The new Agreement also seeks to provide more flexible implementation processes and tools that can be more easily understood and that will facilitate better procurement practices across the globe. In this regard, the new Agreement:

Updates the text of the Agreement, purportedly facilitating a “plain reading” of its terms;
Provides procedures for increased transparency among the member countries to verify compliance with the terms of the GPA;
Permits increased flexibility to use electronic tools in order to conduct public procurements more efficiently and also to monitor compliance with the GPA obligations;
Allows countries greater flexibility in procuring commercial products;
Authorizes additional compliance tools to support countries trying to move to a single, universal standard for conducting public procurements;
Allows small countries/developing economies more flexibility in structuring their individual public procurement programs;
Creates new, future “Work Programs” that the signatories hope to investigate to allow for improved administration of the GPA, including new ways to harmonize data and implement environmentally-friendly policies; and
Encourages a framework that will be more welcoming for new signatories (including, for example, China).

Updates to the FAR to Implement the KORUS FTA

Beyond the updates to the WTO GPA, there have been additional updates to the regulations to implement the newly implemented U.S./South Korea FTA. This FTA was originally signed in June 2007, but it was not fully ratified by the Senate until October 2011. See Pub. L. No. 112-41. The FTA includes many different provisions, but (for purposes of this blog), there are at least two key points relating to public procurements.

First, the U.S. Government has recognized that the new FTA is generally more advantageous for U.S. businesses than the WTO GPA (to which South Korea has been a signatory since January 1997). On March 2, 2012, the U.S. Government waived South Korea's obligations under the WTO GPA because (according to the U.S. Trade Representative) the new FTA generally provides greater and more comprehensive procurement benefits for U.S. companies than the corresponding obligations under the GPA. See 77 Fed. Reg. 12904.

Second, on March 7, 2012 the FAR Council issued an interim rule updating FAR Part 25 and implementing the new agreement. See 77 Fed. Reg. 13952. Perhaps most importantly for companies selling to the U.S. Government, the interim rule lowered the applicable dollar thresholds for purchases of supplies and services, but left unchanged the dollar threshold for construction contracts. The new thresholds are as follows:

Final Rule for IR&D Reports Fails to Address Most Serious Questions

Sheppard Mullin — Fri, 16 Mar 2012 09:00:53 -0800

By David S. Gallacher and Kerry O'Neill

Last April, we wrote about proposed changes to Department of Defense ("DoD") reporting requirements for independent research and development ("IR&D"), raising concerns about how the proposed change would tie recoverability of IR&D costs to new reporting and disclosure requirements. Recently, Defense Federal Acquisition Regulation Supplement ("DFARS") 231.205-18(c) was finalized, with changes. See 77 Fed. Reg. 4632 (Jan. 30, 2012). This final rule is a mixed bag that got some things right, but also leaves some of the most serious issues unresolved.

First – three things that DoD got right.

Elimination of the $50,000 Threshold. The proposed rule required IR&D reports from all major contractors generating more than $50,000 annually in IR&D costs. However, the regulations define "major contractors" as contractors whose covered segments are allocated more than $11,000,000 in total IR&D costs during the preceding fiscal year. The two different dollar thresholds created confusion as to who should be reporting and what projects should be included in these reports. The final rule removed the redundant $50,000 threshold, clarifying that all "major contractors" with more than $11,000,000 in allocable IR&D costs must submit reports on all of their IR&D projects, regardless of the dollar value of a specific project. Other non-major contractors, the final rule noted, are welcome to submit reports voluntarily.
Clarification Regarding Classified IR&D Projects. The proposed rule would have established a broad-ranging disclosure requirement for all IR&D projects, without regard to whether a project was classified. The final rule clarified that only unclassified projects should be submitted through the DoD's Defense Technical Information Center ("DTIC") website (www.dtic.mil/ird/dticdb/index.html).
Reiterating that Submissions Will Be Protected as Proprietary. The proposed rule required general descriptions of IR&D projects, with no guidance on what should be submitted and no assurances of how the information would be handled within the government. The final rule made clear that information reported through the DTIC website would be considered proprietary under the Freedom of Information Act ("FOIA"), 5 U.S.C. § 552(b)(4), and that it would not be subject to public disclosure. Furthermore, DoD clarified that companies are in control of the level of specificity to be included in the reports.

But – there are at least three things that DoD simply failed to address in any meaningful manner:

Adequacy of Controls at the DTIC Website? The American Bar Association, Section of Public Contract Law, pointed out that the security of the DTIC website was questionable, to which DoD merely assured that "adequate controls are in place" and that "sufficient measures are being employed." We were hoping for more than an assertion of "adequate assurances." It does a company no good to have its data treated as proprietary under FOIA, where the underlying data source remains at risk.
Role of DCAA in Auditing and Evaluating Reports? The final rule acknowledged concerns over tying the allowability of IR&D costs (audited by the Defense Contract Audit Agency ("DCAA")) to the submission of these technical reports, but DoD addressed these concerns only obliquely. While the final rule states that contracting personnel will retain authority to determine whether IR&D projects are "of potential interest" to the DoD, it also reinforces the fact that collaboration between the technical team and audit team must take place. "[W]hen specialized expertise is required, contracting officers are expected to consult with auditors and other individuals with specialized experience, as necessary, to ensure a full understanding of issues." This perplexing statement only serves to raise additional questions: When will expertise be required? When will consultation be necessary? What issues will auditors and experts help to resolve? And why are cost auditors involved in an evaluation of a technical project in the first place?
What Information Will Be Required in These Reports? The final rule states that companies are in control of the level of specificity to be included in the reports, including the types of proprietary information to be included. In fact, the instructions prepared by DTIC for submitting the IR&D reports identify the information to be entered in the various data fields (project title, project number, status/readiness level, anticipated expenditures, targeted DoD organization, etc.), calling for "a 1-2 sentence summary" of the IR&D project and a brief project description, not to exceed 10,000 alpha numeric characters (about three typed pages). While we appreciate that DoD hopes to limit the overall reporting requirement (a reporting requirement that the proposed rule estimated would take only 30 minutes for each report), we wonder whether DCAA auditors will insist on "more" information when evaluating the quality of the IR&D reports, especially given that DCAA has a long history of over-reaching and of invasive audit demands into areas in which they have no functional expertise. Somehow, we doubt that DCAA will be willing to show much restraint.

Whether requiring these reports is a good idea is now a moot point – the rule is final and all major contractors are required to report so that the DoD can regain greater visibility into IR&D funding and better evaluate whether the funded projects have a discernible technological purpose that benefits DoD. But, beyond the increased audit scrutiny, we think that this new reporting requirement reflects a continuing shift in DoD's overall policy approach to IR&D, with DoD hungry for more rights and more visibility into research and development projects that, by regulation, must remain independent. Given the high value that is inevitably associated with this incessant search for more, we are quite sure that companies would rest easier if their concerns were actually addressed in the final rule in a substantive manner.

MAS March Madness 2012: Final Rule for Increased Competition in MAS/BPA Orders

Sheppard Mullin — Fri, 16 Mar 2012 08:59:26 -0800

By Alexander Major

A year ago, we advised our readers of the interim rule intended to emphasize competition under GSA Federal Supply Schedule (“FSS”) contracts and FSS Blanket Purchase Agreements (“BPAs”) here. To recap, the March 2011 interim rule imposed a requirement for varying degrees of competition for orders above the FAR’s $3,000 Micropurchase Threshold depending on the type of order being placed (i.e., with or without a statement of work (“SOW”) or placed under a multiple award BPA). The final rule becomes effective April 2, 2012.

The final rule varies very little from the interim rule, with minor changes focusing on BPAs. The final rule:

Corrects a previous error, which had established $100 million as to the threshold that would trigger a contracting officer's obligation to document the agency’s determination for a single award BPA. The corrected trigger is $103 million;
Requires that the ordering activity determine, in connection with BPAs for hourly-rate services, that the total price is “reasonable” and requires further that the determination be documented in the file; and
Eliminates the interim rule’s requirement, under single-award BPAs, that the contracting officer’s annual determination must first be approved by the ordering activity’s competition advocate before the exercise of an option to extend the BPA. Although lessening oversight over massive sole source contracting actions, the Board believed the interim rule’s approval requirement was “too stringent a requirement for the exercise of an option, which is generally within the contracting officer’s authority.”

This updated matrix, prepared by Jonathan Aronie, co-author with John Chierichella of the GSA Schedule Handbook (West 2011), provides a useful summary of the new rules.

Terrorism and Taxes - Proposed FAR Rule Imposes 2% Tax on Foreign Offers to Fund 9/11 Relief Fund

Sheppard Mullin — Fri, 16 Mar 2012 08:58:01 -0800

By David Gallacher and John Bonn

On January 2, 2011, the President signed the James Zadroga 9/11 Health and Compensation Act of 2010, Pub. L. No. 111-347, which set up a relief fund for victims, first responders, and construction workers who were injured in the September 11 terrorist attacks in New York City. To pay the estimated $4.3 billion price tag for the Act, Section 301 of the Act imposed on any foreign person a tax equal to 2% of federal procurement payment received by that foreign person. See 26 U.S.C. § 5000C. In addition, any person who makes or otherwise is a withholding agent with respect to such a payment is required to withhold the 2% tax from the federal procurement payment and remit the tax withheld to the Internal Revenue Service (“IRS”) under tax laws and regulations applicable to withholding of United States taxes from payments made to foreign persons. Although the tax has been in place for more than 14 months and the IRS has issued a revised Form 1042 with revised instructions to implement withholding and reporting obligations, the Government is only now turning to the details of how this tax will be accounted for in connection with the procurement process. And – as is often the case – there is quite a lot of devil in those details.

A proposed Federal Acquisition Regulation was issued on February 22, 2012 stating that the 2% tax cannot be recovered by foreign offerors on any new flexibly-priced or fixed-price contracts. See 77 Fed. Reg. 10461. Exactly how this will play out in the world of government contracting remains to be seen, but foreign companies should be aware of how this new tax may impact their bottom line, and U.S. companies should be aware of the IRS withholding and reporting requirements imposed by the Act with respect to the 2% tax. Companies should pay particular attention to the following points:

Be aware that "foreign person" does not necessarily mean the same thing under the tax code as it does under the procurement or export laws. As such, companies could be subject to this tax even if they are organized under U.S. law.
This tax poses significant risks for withholding agents, who are required under tax laws to withhold certain taxes owed by foreign persons. If the foreign person fails to pay the tax, the withholding agent could be on the hook for the tax liability.
Determining what payments this tax applies to will be a nightmare because it could apply to a host of different persons and products in a host of different circumstances, none of which are clearly spelled out in the statute, the IRS guidance, or the proposed acquisition rules. Consider that the statute imposes the tax on certain specified Federal procurement payments, which are made to certain foreign persons, for the purchase of certain foreign-made products or foreign-performed services, with the tax being applied consistent with certain international agreements (including, presumably, free trade agreements and international tax treaties). It will be difficult for a company to craft a "one size fits all" solution to identify taxable transactions and to ensure that the tax is withheld and paid appropriately.

Good advice here would be "Consult your tax counsel," particularly for those government contractors who are most likely to be dealing with taxable "specified Federal procurement payments" in the regular course of business.

The DoD IG Has Moved

Sheppard Mullin — Fri, 16 Mar 2012 08:57:37 -0800

The Office of the Inspector General of the Department of Defense recently changed its mailing address. Unfortunately, some contractors have failed to notice the change, and have used the old address in attempting to submit their disclosure letters. Unfortunately, these disclosures were returned to sender. The new address(es) are below, and detailed information can be found here. For further information regarding the mandatory disclosure rule, please see our previous posting on the ABA’s Guide to the Mandatory Disclosure Rule or an article authored by two of our government contracts partners, Louis D. Victorino and John W. Chierichella, republished with permission from The Government Contractor.

Mailing address:

Office of Inspector General of the Department of Defense
Investigative Policy and Oversight
Contractor Disclosure Program
4800 Mark Center Drive, Suite 11H25
Alexandria, VA 22350-1500

For FedEx and UPS packages use the following address:

Department of Defense Office of Inspector General
ATTN: ALSD/PMD Podium Warehouse - HL-02
SA Frances Lynn McCormick
Investigative Policy and Oversight Suite 11H25
4800 Mark Center Drive
Alexandria, VA 22311

The 8(a) Mentor Protégé Program: Opportunities for Large and Small Businesses

Sheppard Mullin — Mon, 13 Feb 2012 12:20:10 -0800

By Kerry O’Neill

Under the Small Business Administration’s (“SBA”) 8(a) Mentor-Protégé program, large businesses provide various forms of business development assistance to small businesses participants, including, for example, technical and/or management assistance, financial assistance, and assistance in performing prime contracts. The program, whose governing regulations are set out in 13 C.F.R. Part 124, offers substantial opportunities for large businesses to participate in performance of federal government contracts through partnering with 8(a) program participants on a variety of contractual arrangements, including set-aside procurements, subcontracts, and prime contracts.

Mentors and Protégés: How to Qualify

Any business or non-profit entity that “demonstrates a commitment and ability to assist developing 8(a) Participants” may act as a mentor.

To be a mentor, a business must demonstrate that it 1) possesses favorable financial health; 2) possesses good character; 3) does not appear on the Federal list of debarred or suspended contractors; and 4) can impart value to a protégé firm. Mentors must submit copies of financial statements to the SBA. A mentor may have more than one protégé at a time under certain circumstances, subject to approval by the Associate Administrator for 8(a) Business Development (“AA/BD”).

To qualify as a protégé, a small firm must 1) be in the developmental stage of program participation; or 2) have never received an 8(a) contract; or 3) have a size that is less than half the size standard corresponding to its primary NAICS code.

Benefits

Two firms approved by the SBA to be a mentor and protégé under §124.520 may joint venture as a small business for any Federal government prime contract or subcontract, including but not limited to 8(a) set asides, provided the protégé qualifies as small for the size standard corresponding to the NAICS code assigned to the procurement.

SBA must approve the mentor-protégé (“MP”) agreement before the two firms may submit an offer as a joint venture, in order to receive the exclusion from affiliation. Additionally, in order to receive the exclusion for both 8(a) and non-8(a) procurements, the joint venture must meet the requirements set forth in §124.513(c). If all requirements are met, no determination of affiliation or control may be found between a protégé firm and its mentor.

The MP written agreement must provide a detailed description of the protégé’s needs, and a timeline for delivery of assistance the mentor commits to provide to address those needs. The mentor must commit to provide such assistance for at least one year, among other requirements. The agreement must be approved by the SBA. It will not be approved if the SBA determines that the assistance to be provided is not sufficient to promote any real developmental gains for the protégé, or if SBA determines that the agreement is merely a vehicle to enable the mentor to receive 8(a) contracts. SBA will review the MP relationship annually for compliance.

The protégé must report on all assistance provided by the mentor annually, and must describe in detail all federal contracts awarded to the MP joint venture. Additionally, after contract performance is complete, the protégé must submit a report to its servicing SBA district office explaining how the applicable performance requirements were met.

Performance Requirements

For any 8(a) contract, or a non-8(a) contract for which the MP joint venture seeks an exclusion from affiliation, the MP joint venture must perform the applicable percentage of work required by §124.510 and §124.513(d). The MP joint venture entity must perform at least 51% of the work of the total contract. The protégé must perform at least 40% of the work done by the joint venture partners in the aggregate. The protégé must receive profits commensurate with the work performed by the protégé. The work performed by the protégé must be more than administrative or ministerial functions so that the protégé gains substantive experience.

A mentor, or any of its affiliates, may not act as a subcontractor (at any subcontracting tier) to the MP joint venture. The purpose of this rule is to prevent would-be mentors from indirectly increasing the work they perform under the contract.

Consequences

Should the SBA determine that a mentor has not provided to the protégé firm the assistance set forth in the MP agreement, SBA will terminate the MP agreement, in which case the firm will be ineligible to act as a mentor for a period of two years. Additionally, SBA has the discretion to recommend to the relevant procuring agency to issue a stop work order for each federal contract for which the mentor and protégé are performing as a small business joint venture. SBA may also initiate debarment proceedings against the mentor on various grounds, including, but not limited to, the mentor’s failure to comply with the terms of a public agreement under 2 C.F.R. §180.800(b).

Penalties for Expressly Unallowable Costs - The ASBCA Reconsiders and Ups the Ante for Contractors

Sheppard Mullin — Mon, 13 Feb 2012 12:10:45 -0800

By John W. Chierichella and Alexander W. Major

Under FAR 42.709-1, penalties for expressly unallowable costs are to be waived when the expressly “unallowable costs under this proposal” are less than $10,000. Although there are other bases for the waiver of the penalties, those other bases are discretionary. The $10,000 exclusion is mandatory.

In Thomas Assoc., Inc., ASBCA No. 57126, May 17, 2011, 11-1 BCA ¶ 34,764, the ASBCA considered an appeal from the imposition of penalties for five expressly unallowable “cost items”. One item involved costs of $44,959, which was in excess of the $10,000 exclusion and thus ineligible for the mandatory waiver. Each of the other four cost items involved costs of less than $10,000. Although the total expressly unallowable costs included in the indirect cost proposal exceeded $10,000, the Board considered the four cost items individually and held that the Contracting Officer was required to waive the penalty for each of the expressly unallowable cost items that was less than $10,000.

Not for long.

The Government moved for reconsideration of the Board's decision and introduced on reconsideration, for the first time, the FAR/DFARS case file relating to the drafting of FAR 42.709-5. Relying on that newly adduced administrative history, to which the Appellant did not object, the Board concluded that waiver applies only when the expressly unallowable costs, in the aggregate, are less than $10,000. Thomas Assoc., Inc., ASBCA No. 57126, Oct 18, 2011, 11-2 BCA ¶ 34,858. The Board was persuaded by the drafting history, which specifically addressed the issue and added to the final rule parenthetical language linking the waiver to expressly unallowable costs of $10,000 or less allocable to the contracts in question. The Board noted that FAR 42.709-1, which establishes the basic penalty rule, speaks in the singular to any “indirect cost” that is expressly unallowable. By contrast, FAR 42.709-5, which establishes the waiver, speaks in the plural, dispensing with the penalty when “the amount of the unallowable costs under the proposal . . . is $10,000 or less.”

The result of the Board’s decision on reconsideration is obvious – “little things mean a lot.” A few relatively minor inadvertent errors can and will trigger penalties. Moreover, the penalties attach to the submission of the final indirect cost proposal unless the proposal is withdrawn before the initiation of the proposal audit, even if Uncle Sam never pays the costs. Contractors apparently will no longer be able to count on a “free pass” for individual cost errors at or below the $10,000 threshold if, in the aggregate, they exceed that threshold. The cost of minor mistakes just went up. Caveat venditor.

Fisher v. Halliburton: Fifth Circuit Invokes Common Sense To Defend Defense Base Act

Sheppard Mullin — Mon, 13 Feb 2012 12:05:35 -0800

By Alex Major

In March 2010, a federal district court in Texas ruled that the deaths and injuries sustained by a group of civilian convoy drivers in Iraq during insurgent attacks were not “accidents” caused by conditions of their employment and were, therefore, outside the scope of the protections afforded to contractors by the Defense Base Act (“DBA”). 42 U.S.C. § 1651, et seq. Fisher v. Halliburton, 703 F. Supp. 2d. 639 (S.D. Tex. 2010). We previously described and criticized the district court decision in this blog, noting that it was now unclear how, exactly, the DBA would fare in future litigation. But on January 12, 2012, the Fifth Circuit restored clarity— and common sense—to the application of the DBA by recognizing that the facts in Fisher presented “the quintessential case of a compensable injury arising from a third party’s assault”. Holding the DBA to be the exclusive remedy for damages, the Fifth Circuit vacated the district court’s decision and remanded the case for further proceedings. Fisher v. Halliburton, 2012 WL 90136 (5th Cir. 2012).

The Fifth Circuit efficiently disposed of the district court’s decision, beginning with a determination that the third party, i.e., insurgent, acts were directed against Plaintiffs “because of [their] employment.” Forcefully disagreeing with the district court’s conclusion that the employees were targeted for simply being Americans and not because they were providing logistical support to the U.S. Military, the court cautioned that such reasoning threatened the applicability of the DBA “on foreign soil” or to “those that support a war.” Moreover, the court stated, if the reasoning of the district court were sustained, then “[t]he argument could always be asserted that an employee was killed or injured not because of her employment, but because she was an American.” Accordingly, the circuit court found it to be “self evident” and “a matter of common sense that when insurgent forces in Iraq attack an Army-led fuel supply convoy, the insurgents are attacking the convoy because of its role in supporting the Army’s operations in that country.”

The Fifth Circuit then disposed of another argument raised by Plaintiffs in Fisher, i.e., that the Plaintiffs’ injuries were caused by the defendant-contractor, who, they alleged, committed an intentional tort by failing to act to protect Plaintiffs from “substantially certain” injury at the hands of the insurgents. This argument, premised on intelligence reports and open-source news reports, reasoned that the defendant knew that the assaults would occur and did nothing to stop the convoys from moving forward. While recognizing that the “intentional tort exception” has not been applied in the Fifth Circuit to the either the DBA or the Longshore and Harbor Workers' Compensation Act (“LHWCA”), upon which the DBA is based, the court noted that, when applying this exception, other courts “consistently require that the employer have had a specific intent or desire that the injury occur” and that neither circumstance existed here. Moreover, the circuit court reiterated the purpose of the DBA and concluded that its “provisions admit of no exception for cases in which an employee claims his employer was ‘substantially certain’ that the employee would be assaulted by a third party because of his employment.” The circuit court essentially recognized the difficulty in applying a “substantially certain” exception premised on purportedly informed conjecture derived from military intelligence and open-source news. To allow a “substantially certain” exception would undercut the very purpose of the DBA of “providing prompt relief for employees, and limited and predictable liability for employers.” Therefore, the court concluded, coverage under the DBA precludes an employee from recovery from its employer “under a ‘substantially certain’ theory of intentional-tort liability.”

Finally, the Fifth Circuit did agree with the district court that the DBA prevents an employee from bringing a fraud claim to recover damages for a DBA-covered injury. Echoing the sentiment of the lower court, the circuit court held that any deceit proven against the employer that led to the compensable injury “merges into that injury for purposes of compensation coverage.”

In his book recounting his leadership of the American Expeditionary Forces in World War I, My Experiences in the World War, General John Pershing reflected that “military science is based on principles that have been deduced from the application of common sense in the conduct of military affairs.” The Fifth Circuit’s defense of the DBA in vacating and remanding the lower court’s ruling in Fisher v. Halliburton, recognizes that the same application of common sense should be brought to bear in the application of U.S. law in the battlespace.

Mandatory Debarment for FCPA Violations? A Bad Idea Whose Time Should Never Come

Sheppard Mullin — Mon, 13 Feb 2012 12:00:26 -0800

By Mike Emmick

In the fervor of the U.S.'s current anti-foreign-corruption efforts, a particularly misguided proposal has occasionally reared its ugly head: Requiring “mandatory debarment” for any company that violates the Foreign Corrupt Practices Act (“FCPA”).

On the merits, such a proposal is completely wrong-headed. Debarment is a severe, forward-looking administrative remedy – the corporate “death penalty” – not a vehicle to “boost” the penalties for past criminal FCPA violations.

Nonetheless, in 2010, such a “mandatory debarment” bill was passed by the House, only to die in Congress due to Senate inaction. Optimistic multinational contractors might therefore have concluded, “Whew, we dodged that bullet.”

However, a recent law-review article has sought to resurrect the debarment idea, contending that no other remedy will deter large global companies from violating the FCPA.

Below is a snapshot of the relevant law, recent developments, and pertinent arguments. As will be explained, despite the recent article, the notion of “mandatory debarment” is unlikely to gain traction – even the Department of Justice (“DOJ”) opposes it – but the article and the current anti-corruption frenzy may cause authorities to reconsider the idea. Any multinational company that does substantial government contract work should therefore monitor and resist such efforts.

As nearly everyone who operates in this market knows by this time, the FCPA prohibits U.S. companies from paying bribes to foreign officials in order to obtain or retain business. The FCPA also requires accurate books and records and meaningful internal accounting controls. Violations of the FCPA can result in huge criminal and civil fines, disgorgement of profits, and payment of interest, not to mention a wide range of collateral consequences. The FCPA is enforced by DOJ and the SEC.

Over the past five years DOJ has been extremely aggressive in its prosecution of FCPA violations. Eight of the ten largest FCPA fines in history occurred in 2010, and multi-million-dollar fines have now become routine. There are currently dozens of pending FCPA investigations – many more than in previous years. Indeed, DOJ has dubbed this “the new era of FCPA enforcement.”

Congress attempted to climb aboard this FCPA-enforcement bandwagon when, on September 15, 2010, the House unanimously passed a “mandatory debarment” bill – H.R. 5366, known as the 2010 Overseas Contractor Reform Act. The bill would have created a government-wide policy that no contracts be awarded to companies or individuals that violated the FCPA. H.R. 5366, § 3. Procedurally, the law would have required the contracting agency to propose for debarment all contractors found to be in violation of the FCPA.

The bill was flawed in many ways. It did not define a “finding” of an FCPA violation, so it was unclear whether the debarment would be triggered by a non-prosecution or deferred prosecution agreement. The bill failed to differentiate between major and minor FCPA violations, or between different kinds of violations (i.e., bribe payments versus “books and records” or accounting violations). The bill did not require or permit consideration of how the violation occurred, whether the company self-reported the violation, or whether the company dramatically improved its anti-corruption compliance program thereafter.

Shortly after the bill was passed, DOJ answered questions about the FCPA generally, as the Chamber of Commerce was proposing FCPA amendments. DOJ expressed its opposition to “mandatory debarment,” stating that mandatory debarment “would likely be counterproductive, as it would reduce the number of voluntary disclosures and concomitantly limit corporate remediation and the implementation of enhanced compliance programs.” According to DOJ, such a debarment program could also hurt the government's ability to investigate and prosecute transnational corruption. Linking debarment to criminal conviction would “fundamentally alter the incentives of a contractor-company,” because an FCPA resolution would then cause the company to suffer a dramatic reduction in revenue. That, in turn, would negatively impact prosecutorial discretion and the flexibility to reach an appropriate resolution given the facts and circumstances of the particular case.

DOJ's opposition would ordinarily be enough to ensure that “mandatory debarment” would not be taken seriously. And in fact the Senate took no further action on the House bill, perhaps because of DOJ's opposition after the House bill was passed.

However, a recent law-review article has sought to resurrect this misguided debarment notion. In November 2011, Fordham Law Review published a 70-page article entitled “FCPA Sanctions: Too Big to Debar,” available here, which was written by Professor Drury Stevenson of the South Texas College of Law, along with one his law students. The article took the position that debarment should be considered as an additional punishment for FCPA violations. According to the article, corporations can only be punished via fines, and government contract revenues are so large that fines often become a mere “cost of doing business,” which prevents those fines from having deterrent value. In addition, the public may interpret a failure to debar a company as suggesting that companies can buy their way out of FCPA violations.

The article acknowledged that mandatory debarment might discourage self-disclosure – one of DOJ's concerns – but proposed that self disclosure might be meaningfully rewarded through a reduced criminal fine. The article also acknowledged that debarment might be the contractor's “death knell”; it might even raise an “Arthur Andersen” problem by driving an important and responsible company out of business entirely, which might harm the contracting market, foreign relations, national security, and the company's shareholders. As an alternative to mandatory debarment, the article proposed an increase in discretionary debarments based on FCPA violations.

For a number of reasons, “mandatory debarment” for FCPA violations is a bad idea. In fact, In January 2012, two months after “Too Big to Debar” was published, Fordham Law Review published a responsive article authored by Jessica Tillipman, a professor at George Washington Law School. Jessica Tillipman, “A House of Cards Falls: Why “Too Big to Debar” is All Slogan and Little Substance”, available here. Tillipman disagreed with nearly all of Professor Stevenson's conclusions and analysis, and her remarks warrant summarizing here.

First, the debarment provision in the Federal Acquisition Regulations (FAR) is itself inconsistent with “mandatory debarment.” FAR 9-402(b) states that “the serious nature of debarment and suspension requires that these sanctions be imposed only in the public interest for the Government's protection and not for purposes of punishment.” (Emphasis added.) The point of debarment is to ensure that the government works with “responsible partners.” Indeed, that is why the prosecutors handle the fines, and the debarring officials handle the debarment.

Second, the FAR expressly requires the debarment officials to consider whether the contractor undertook remedial measures or whether the violation involved mitigating factors that demonstrate that the contractor is still “presently responsible.” FAR 9-406-1. Mandatory debarment would make those provisions meaningless, and would shift the focus of debarment from future conduct to past conduct.

Third, imposing the remedy of “mandatory debarment” would unfairly focus on government contractors, not on other companies or individuals that may violate the FCPA. Why should contractors be discriminated against – especially automatically discriminated against?

Fourth, debarment is an inappropriate “all or nothing” remedy. Its use might destroy responsible companies – even essential companies – that have thousands of employees and contribute immensely to the economies of the U.S. and the world. That is why debarment should be used only rarely, and only after an extensive review of what prompted the transgression, how the company responded, and other important factors.

Fifth, if mandatory debarment were to become the law, it might even discourage large companies from engaging in business with the U.S., because their devotion of time to and their monetary investments in government contract work could be lost at the whim of federal prosecutors, perhaps as the result of actions by rogue employees who clandestinely refused to adhere to the companies' anti-corruption compliance program.

Finally, as DOJ itself pointed out in 2010, “mandatory debarment” might actually hurt the US's FCPA-enforcement efforts by discouraging corporate self-disclosure and cooperation as part of the remediation process. Those procedures are currently a critical source of information for DOJ to use in its prosecution of FCPA violations.

In light of DOJ's opposition, “mandatory debarment” for FCPA violations is unlikely ever to become law. Nonetheless, because the consequences would be potentially devastating, any such possibility should be monitored closely by and vigorously opposed by global contractors.

"Buy American" and Photovoltaic Devices - Interim Rule Issued by DoD

Sheppard Mullin — Mon, 13 Feb 2012 11:59:48 -0800

By David Gallacher and Curt Dombek

Last year in January 2011, the President signed the 2011 National Defense Authorization Act (Pub. L. No. 111-383, Section 846), which included a “Buy American” requirement for photovoltaic devices being purchased by the U.S. Department of Defense (“DoD”). We previously discussed this new requirement in our blog. Twelve months later, the DoD has issued an interim rule to implement this new requirement. See 76 Fed. Reg. 18858 (Dec. 20, 2011). The interim rule appears to be straightforward, implementing exceptions and manufacturing requirements with which most companies are already familiar under the Buy American Act or the Trade Agreements Act, but there is some fine print of which all companies selling photovoltaic devices to the DoD should be aware.

Key Definitions

The interim rule includes a new subsection at Defense Federal Acquisition Regulation Supplement (“DFARS”) 225.7017, as well as a new contract clause at DFARS 252.225-7017, Photovoltaic Devices, and a corresponding certification requirement at DFARS 252.225-7018. Defining its key concepts, the interim rule largely restates the statutory language from Section 846 by defining “covered contracts” and “photovoltaic device.”

“Covered contracts” means “an energy savings performance contract, a utility service contract, or a private housing contract awarded by DoD, if such contract results in DoD ownership of photovoltaic devices, by means other than DoD purchase as end products. DoD is deemed to own a photovoltaic device if the device is – (1) Installed on DoD property or in a facility owned by DoD; and (2) Reserved for the exclusive use of DoD for the full economic life of the device.” Note that a “covered contract” will not include government contracts valued at less than $150,000 (the simplified acquisition threshold).

“Photovoltaic device” means “a device that converts light directly into electricity through a solid-state, semiconductor process.” Under this definition, a solar panel containing many individual solar cells would constitute a “photovoltaic device.” If such a panel were manufactured or assembled in the United States in a manner that constituted a substantial transformation (thus qualifying as a “domestic product”), the photovoltaic device would appear to qualify under this regulation, just as it would have under prior rules.

Applicable Dollar Thresholds and Products from U.S. Allies

The interim rule also breaks out the applicable dollar thresholds/categories at which the various free trade agreements apply.

There are at least four issues worth noting about the applicable dollar thresholds and lists of approved countries:

Dollar Thresholds Apply to the Value of Photovoltaic Devices. The dollar thresholds apply to the value of the photovoltaic devices being purchased as part of the overall contract. As such, if you have a $3 million contract with the DoD but estimate only $100,000 in photovoltaic devices as a part of that overall contract, then it is the $100,000 figure that would determine whether specific trade agreement exceptions apply for the photovoltaic devices.
Updated Dollar Thresholds. These dollar thresholds have been updated effective January 1, 2012, which unfortunately means that the new interim rule is already out of date. While these thresholds will no doubt be reconciled when a final rule is eventually issued, the different thresholds will be confusing in the interim.
Qualifying Countries. The DoD has entered into Memoranda of Understanding with twenty-one U.S. allies whose ministries of defense have agreed that neither the U.S. nor the ally will discriminate against the other in defense procurements. Accordingly, the interim rule acknowledges that purchases at any dollar threshold will satisfy the “Buy American” requirement where the photovoltaic devices are from a “qualifying country,” which includes Australia, Austria, Belgium, Canada, Denmark, Egypt, Finland, France, Germany, Greece, Israel, Italy, Luxembourg, Netherlands, Norway, Portugal, Spain, Sweden, Switzerland, Turkey, and the United Kingdom. Note that even though the U.S. and South Korea have entered into a newly expanded free trade agreement that should be fully implemented in 2012, the free trade agreement does not include a MOU between the DoD and the South Korean Ministry of National Defense such that South Korea would be included on this list as a “qualifying country.” However, South Korea remains a signatory to the WTO GPA, and photovoltaic devices from South Korea would satisfy the interim rule when purchases are at or above the $203,000 threshold.
U.S.-Oman Free Trade Agreement. The rule does not include the U.S.-Oman free trade agreement entered into in 2009, which does not cover the DoD. Oman, therefore, is not listed as an “approved” country under the new DoD photovoltaic rules, even though a product form Oman would otherwise qualify under the Trade Agreements Act when purchased by most civilian agencies.

Other Key Features of the Interim Rule

Components. The interim rule reinforces the fact that it is concerned only with the country of origin for the manufactured end-product – not the components. Where the Buy American Act commonly requires that an end-product be both: (1) manufactured in the U.S.; and (2) consist of more than 50% in domestic component parts, the new photovoltaic “Buy American” requirement requires only that the manufactured photovoltaic device end-product be manufactured in the U.S. or a qualifying country (or a free trade agreement partner, if applicable). This means that a domestically manufactured photovoltaic device could consist of entirely foreign content, so long as the final end-product was manufactured or substantially transformed in an approved country.

Commercial Products. The interim rule expressly states that this rule applies to commercial purchases.

Unreasonable Cost Exception Remain Available. An existing exception under the Buy American Act permits DoD to purchase products from non-approved countries when the cost of a product from an approved country is 50% more than the product from a non-approved country. In this respect, the interim rule does not absolutely require the purchase of domestic photovoltaic devices, but merely establishes a sizeable preference for the purchase of domestic products or other qualifying goods.

Conclusion

It is doubtful whether Section 846 was even necessary in the first place – after all, the statute merely directed DoD to ensure that the purchases of photovoltaic devices comply with the Buy American Act and the Trade Agreements Act, two statutes that would have applied to DoD purchases even if Section 846 were never passed. Nevertheless, now that the DFARS has been amended with this interim rule, there should be greater clarity for contractors regarding the types of products that will satisfy the new requirement, as well as the specific procedures on how this new “Buy American” requirement will be implemented (particularly with regard to the valuation of photovoltaic devices being procured as part of a larger government contract). DoD is accepting comments on the interim rule through February 21, 2012.

New 2012 Updates to U.S. Free Trade Agreements Expected; No Progress With China

Sheppard Mullin — Mon, 13 Feb 2012 11:58:53 -0800

By David Gallacher

2012 will see changes regarding U.S. free trade agreements relating to, first, the dollar thresholds at which the various agreements apply to federal purchases and, second, the likely expansion of the scope of the World Trade Organization Government Procurement Agreement ("WTO GPA"). The updated dollar thresholds are important for government contractors because the thresholds determine when a contract is subject to the Buy American Act ("BAA") or the Trade Agreements Act ("TAA"). As to the WTO GPA, its expansion should provide significant increased access to the U.S and many of its trading partners in international procurements, although the hoped for accession of China to the WTO GPA remains stalled

Updated Dollar Thresholds

On December 8, 2011, the U.S. Trade Representative ("USTR"), Ronald Kirk, announced the dollar thresholds at which free trade agreements ("FTAs") will apply to U.S. procurements beginning in 2012. See 76 Fed. Reg. 76808. The USTR has raised some thresholds, maintained others, and even lowered some:

As we discussed previously in this blog when the thresholds were last adjusted in 2010, it is unclear whether the FAR will need to be amended to incorporate the new thresholds or whether the new thresholds automatically become "effective January 1, 2012" as directed by the USTR. However, on January 30, 2012, the DFARS was amended to incorporate the new dollar thresholds. See 77 Fed. Reg. 4630. While the FAR Councils are no doubt also working on updating the relevant FAR clauses at FAR Subpart 25.4, any new rules will probably not be issued until February or March 2012. Contractors should be aware that Contracting Officers may take even longer to update individual contracts, or, for that matter, to agree that modifications to existing contracts are appropriate in the first place.

Pending Updates to the WTO GPA

In December 2011, the members of the WTO met in Geneva to revise the WTO GPA. Ever since Canada and the U.S. negotiated amendments to the U.S.-Canada FTA allowing Canada greater access to procurements by state and local governments (one of the primary outlets for stimulus funds through 2009 and 2010), members of the WTO have clamored for expanded access under the GPA. FTAs typically apply only to governmental agencies that are specifically listed in the free trade agreement; the new December 2011 agreement allows expanded access by foreign companies to U.S. procurements by listing twelve previously uncovered federal agencies (including the Social Security Administration and the Transportation Security Administration) as now covered by the WTO GPA. In exchange, U.S. companies will gain access to hundreds of foreign "central and sub-central" government procurements in countries such as Japan, South Korea, Israel, and many other E.U. countries. The new WTO agreement is expected to open significant international procurement markets, and the USTR hailed the new agreement as a major breakthrough for free trade. The changes to the WTO GPA are expected to be formalized by March 2012.

Meanwhile, in November 2011, China updated its submission to accede to the WTO GPA. But the submission fell short of U.S. and E.U. expectations, setting extremely high dollar thresholds and exempting a large number of Chinese sub-central agencies and state-run enterprises. China joined the WTO in 2001 and China has reiterated that it intends to accede to the WTO GPA. However, given the above high dollar thresholds and exemptions, China has thus far been unable to make the kind of aggressive offers demanded by the international community to complete its accession. Therefore, at least for the time being, products made in China will continue to be noncompliant under the Trade Agreements Act.

Current signatories to the WTO GPA include more than 40 countries: the U.S., the 27 member states of the European Union, Canada, Armenia, Aruba, Hong Kong, Iceland, Israel, Japan, Liechtenstein, Norway, Singapore, South Korea, Switzerland, and Taiwan. Armenia is the most recent addition to the WTO GPA, having just recently acceded to the WTO GPA on September 15, 2011. See 76 Fed. Reg. 58856; 77 Fed. Reg. 4631.

No Stone Unturned--Mitigating Risk In A Government Contracts Due Diligence

Sheppard Mullin — Mon, 13 Feb 2012 11:57:33 -0800

By Marko W. Kipa, Anne B. Perry, and Lucantonio N. Salvi

An acquisition transaction involving a government contractor brings with it a unique set of rules and regulations. There is no shortage of frequently changing and complex requirements regulating a government contractor’s operations, and a firm grasp of these requirements is crucial both to arriving at a proper valuation of a target company and to understanding the risks associated with the transaction.

Three of our Government Contracts lawyers – Marko W. Kipa, Anne B. Perry, and Lucantonio N. Salvi – recently published an article that assists buyers and sellers in identifying the most common risk areas in an acquisition transaction involving a government contractor. With permission of The Government Contractor, the article is reproduced in full in this issue of our blog.

Click here to view a PDF copy of the article.