While the new steps are constructive, the process still is far from perfect.
Debriefings of unsuccessful government contract bidders are unusual events with little parallel in commercial contracting. The regulations are confounding on whether a debriefing is required, when the debriefing should be provided and what the debriefing must contain. One almost needs an expert just to decipher the debriefing rules in a particular situation.
Often, the attendees come to the table with very different agendas. Theoretically, a debriefing is an opportunity for disappointed bidders to learn from the government how to improve their proposals for the next procurement. From the government’s side, another objective is to give the contractor sufficient explanation of the award rationale to dissuade the contractor from filing a protest.
To read the full article, please click here.
“Recent Improvements in Government Contract Bid Debriefings,” by Al Krachman was published in SIGNAL Magazine on October 8, 2015. Reprinted in part with permission.
Recent Improvements in Government Contract Bid Debriefings
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An Overbroad Confidentiality Agreement Could Cost Your Company a DoD Contract, or Worse
Action Item: Defense contractors should promptly examine their personnel policies and employee confidentiality agreements to avoid a serious risk created by a new DoD Contract Clause and Certification. If a contractor’s policies and agreements do not carve out whistleblower reporting, the contractor could find itself facing a default termination, a bid protest, or even a False Claims Act suit.
On October 29, 2015, the Pentagon issued a new DFARS Clause and new Certification prohibiting DoD from contracting with firms that bind employees to confidentiality agreements restricting the employees’ ability to report fraud, waste or abuse to appropriate investigative authorities. Both the Clause and the Certification are effective immediately. While most confidentiality provisions in personnel manuals or free standing employment agreements will not contain language prohibiting whistleblower reporting, to be safe, the new Contract Clause and the Certification effectively requires the contractor to “carve-out” these type of whistleblower reports from all applicable confidentiality provisions.
Unless a contractor’s existing handbook and agreements are crystal clear that the confidentiality provisions do not apply to whistleblower reporting, defense contractors are also now required to notify employees that any existing restrictions on whistleblower reporting are no longer in effect.
The potential remedies for noncompliance with the Clause and Certification range from (1) loss of a new contract award by a bid protest or non-responsibility finding; (2) receipt of a show cause notice and-or default termination; and (3) potential liability under the False Claims Act if the company submits an invoice for payment in breach of the new Certification.
The new DFARS Certification is DFARS 252.203-7996, titled Prohibition on Contracting with Entities that Require Certain Internal Confidentiality Agreements. The new DFARS Contract Clause is DFARS 252.203-7997, with the same name. The new provisions will impose an HR burden on defense contractors, and some unresolved questions exist on the reach of the requirements. The Clause and Certification do not currently extend to non-defense contractors, but we anticipate similar rules will be implemented in the civilian sector through a FAR change in the future.
We recommend that defense contractors promptly examine their agreements, handbooks and personnel manuals, make amendments as needed, and issue appropriate notifications. Non-defense contractors would be well served by doing the same. We are available to answer any questions on this and to assist with necessary amendments, notices, etc., upon request.
© Blank Rome LLP. All rights reserved. Please contact Blank Rome for permission to reprint. Notice: The purpose of this update is to identify select developments that may be of interest to readers. The information contained herein is abridged and summarized from various sources, the accuracy and completeness of which cannot be assured. This update should not be construed as legal advice or opinion, and is not a substitute for the advice for the advice of counsel.
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An Over Broad Confidentiality Agreement Could Cost Your Company a DOD Contract—or Worse
Defense contractors promptly should examine their personnel policies and employee confidentiality agreements to avoid a serious risk created by a new Defense Department contract clause and certification that indicates that if a contractor's policies and agreements do not carve out whistleblower reporting, contractors could face a default contract termination, a bid protest or even a False Claims Act suit.
On October 29, the department issued a new clause and certification to the Defense Federal Acquisition Regulation Supplement, or DFARS, that prohibits the DOD from contracting with firms that bind employees to confidentiality agreements or restrict employees’ ability to report fraud, waste or abuse to appropriate investigative authorities. The change was effective immediately. While most confidentiality provisions in personnel manuals or free standing employment agreements will not contain language prohibiting whistleblower reporting, to be safe, the DFARS change effectively requires contractors to “carve-out” these type of whistleblower reports from all applicable confidentiality provisions.
To read the full article, please click here.
“An Over Broad Confidentiality Agreement Could Cost Your Company a DOD Contract—or Worse,” by Albert B. Krachman was published in SIGNAL Magazine on November 10, 2015. Reprinted in part with permission.
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Inside DOD Whistleblower Rule for Confidentiality Agreements
On Oct. 29, 2015, the undersecretary of defense for acquisition technology and logistics issued a new class deviation, a Defense Federal Acquisition Regulation Supplement contract clause, and a new representation prohibiting the U.S. Department of Defense from contracting with firms that bind employees to confidentiality agreements that restrict their ability to report fraud, waste, or abuse to appropriate investigative authorities. The new DFARS representation is DFARS § 252.203-7996, titled "Prohibition on Contracting with Entities that Require Certain Internal Confidentiality Agreements." The new DFARS contract clause is DFARS § 252.203-7997, with the same name. The class deviation, the clause and the representation are effective immediately.
This article explores issues raised by the new class deviation, the clause and the representation, and risks posed by noncompliance. We recommend that DOD contractors promptly review and revise their agreements in conformity with the new regulations.
Background
The origins of the class deviation, the clause and the representation date to the 2015 appropriations process. On Dec. 16, 2014, Congress passed the 2015 Consolidated and Further Continuing Appropriation Act (Pub. L. 113-325). Section 743 of Title VII of that Law provided:
None of the funds appropriated or otherwise made available by this or any other Act may be available for a contract, grant, or cooperative agreement with an entity that requires employees or contractors of such entity seeking to report fraud, waste, or abuse to sign internal confidentiality agreements or statements prohibiting or otherwise restricting such employees or contactors from lawfully reporting such waste, fraud, or abuse to a designated investigative or law enforcement representative of a Federal department or agency authorized to receive such information.
The Continuing Appropriations Act of 2016 incorporates these restrictions into its appropriations to the DOD.[1] The DFARS clause extends to the 2016 appropriations and beyond. The clause is drawn directly from language in the 2015 act.[2] The broad language employed in the class deviation effectively extends the provision to any funds “appropriated or otherwise made available” to the DOD.
Other federal agencies have issued class deviations under the 2015 act, and some have included a new Federal Acquisition Regulation clause, FAR § 52.203-98 and § 52.203-99, in solicitations.[3] The U.S. Environmental Protection Agency has issued a notice that it cannot award contracts “to an entity that requires employees or contractors of such entity seeking to report fraud, waste, or abuse to sign internal confidentiality agreements or statements prohibiting or otherwise restricting such employees or contactors from lawfully reporting such waste, fraud, or abuse to a designated investigative or law enforcement representative of a federal department or agency authorized to receive such information.”[4] The General Services Administration, U.S. Agency for International Development and the Department of Veterans Affairs are implementing similar policies.[5]
Analysis
The class deviation, clause and representation each implement the requirements of the 2015 act and the 2016 act for the Department of Defense pending the implementation of an amendment to the FAR.[6]
Summary of the Class Deviation, Clause and Representation
The class deviation mandates that the DOD may not award contracts to entities which prohibit “employees or contractors” from “sign[ing] internal confidentiality agreements or statements prohibiting or otherwise restricting such employees or contractors from lawfully reporting such waste, fraud, or abuse to a designated investigative or law enforcement representative.” The class deviation also requires contracting officers to incorporate the clause and representation into all solicitations using funds from the 2015 act and-or the 2016 act. Additionally, the clause must be included in all contracts using funds from the 2015 act and-or the 2016 act. For existing contracts using funds from 2015 act and-or the 2016 act awarded after Oct. 1, 2015, the DOD mandates that contracts be modified to include the clause to the maximum extent practicable.
The representation states that:
(c) Representation. By submission of its offer, the Offeror represents that it does not require employees or subcontractors of such entity seeking to report fraud, waste, or abuse to sign or comply with internal confidentiality agreements or statements prohibiting or otherwise restricting such employees or contractors from lawfully reporting such waste, fraud, or abuse to a designated investigative or law enforcement representative of a Federal department or agency authorized to receive such information.
The representation is a powerful mechanism that applies to every bid and proposal submitted by the contractor. It obligates the contractor to do a pre-bid verification that none of its agreements, handbooks or “statements” contain language that could violate the restriction. As discussed in more detail below, a violation of the representation could also trigger exposure under the False Claims Act.
Beyond the representation, the class deviation mandates that the clause be included in all solicitations and contracts that use funds from the 2015 act or the Continuing Appropriations Act of 2016. The clause mandates that a contractor “[s]hall not require employees or subcontractors seeking to report fraud, waste, or abuse to sign or comply with internal confidentiality agreements or statements prohibiting or otherwise restricting such employees or contractors from lawfully reporting such waste, fraud, or abuse to a designated investigative or law enforcement representative of a Federal department or agency authorized to receive such information.” The clause also requires contractors to notify “employees” that the “prohibitions and restrictions” of any internal confidentiality agreements covered by the clause are no longer in effect.
Remedies for Noncompliance
There are at least three remedies available for violations of the new requirements. First, because the statutory language uses a “no funds may be made available for a contract” convention, a contractor in violation of the restriction could lose an awarded contract by a bid protest from a competitor. If a competitor had evidence that an awardee company was in violation of the restriction when proposals were submitted, it could lodge a bid protest asserting that funds cannot be used on the contract, and the award should be invalidated.
The issue could also arise in a pre-award survey if the government requests an intended awardee to produce evidence that it is in compliance with the DFARS clause. Failure to show compliance could cause the company to fail the survey. Contractors should have a file demonstrating compliance.
Second, a violation could result in termination of an awarded contract. If DFARS § 252.203-7997 is in the solicitation before bid, or is added to an already awarded contract by modification, an uncured violation could serve as a basis for a contract termination. While a contractor should be given an opportunity to cure the noncompliance before facing a termination, that is not assured. In a worst case scenario, it is also possible that the government could demand repayment of contract earnings if the matter became a contract dispute.
The most extreme exposure arises out of the new representation. By submitting an offer, the contractor is making a representation that its confidentiality agreements do not restrict whistleblower reporting. Accordingly, the contractor’s bid or proposal is legally considered to contain an express certification to that effect. If a noncompliant contractor bids, receives an award, performs work and invoices the government, each invoice could be considered to be a false claim under the False Claims Act. Courts have ruled that payment demands of this nature can be a form of contract fraud and could result in the extreme civil and criminal penalties imposed by that statute.
Plainly, the exposures and risks created by noncompliance far outweigh the cost and effort required to amend existing policies and agreements needed to bring the company into conformity.
Open Issues
The deviation and clause contain some inconsistencies and suffer from lack of definition. In particular, the DOD does not make clear to whom the provisions should apply or whether the requirements are intended to “flow down.” In the class deviation, the DOD notes that that the restrictions apply to “employees or contractors.” However, DFARS § 252.203-7996 provides that the restrictions apply to “employees or subcontractors.” It is unclear how this discrepancy should be explained.
Similarly, the class deviation applies its restriction to “confidentiality agreements or statements.” However, DFARS § 252.203-7997 provides that the restrictions apply only to “confidentiality agreements” without mentioning anything regarding “statements.” Additionally, it is unclear what the DOD specifically means by an “internal confidentiality agreement” or “statement.”
The provisions also do not elaborate the extent to which reporting would restrict disclosures to particular federal officials. The restrictions prohibit limiting lawful reporting to a “designated investigative or law enforcement representative of a federal department or agency authorized to receive such information.” It is unclear whether this would be limited to an inspector general or could include other federal officials.
Additionally, the class deviation, representation and clause apparently only restrict contractors from prohibiting “lawful” reporting. There is no definition of “lawful reporting.” This qualification may be based on the statutory language in the 2015 act, which states that it does not alter any law or policy “governing the nondisclosure of classified information.”
Recommendations
Defense contractors should promptly examine their personnel policies and employee confidentiality agreements to avoid the serious risks created by the class deviation, clause and representation. If a contractor’s policies and agreements do not exclude whistleblower reporting, the contractor could find itself facing a default termination, a bid protest or even a False Claims Act suit.
While most confidentiality provisions in personnel manuals or freestanding employment agreements will not contain language prohibiting whistleblower reporting, to be safe, the new clause and the representation effectively require the contractor to “carve out” these types of whistleblower reports from all applicable confidentiality provisions.
Unless a contractor’s existing handbook and agreements are crystal clear that the confidentiality provisions do not apply to whistleblower reporting, defense and some civilian contractors are also now required to notify employees that any existing restrictions on whistleblower reporting are no longer in effect.
Conclusions
We recommend that defense contractors promptly examine their agreements, handbooks and personnel manuals, make amendments as needed, and issue appropriate notifications. Nondefense contractors, especially those that work with agencies that have taken steps to prohibit overbroad confidentiality agreements, would be well served by doing the same.
Footnotes
[1] Pub. L. 114-54.
[2] The 2015 Act also made clear that it did not alter any law or policy “governing the nondisclosure of classified information.”
[3] The FAR Representation at FAR § 52.203–98 is titled, “52.203–98, Prohibition on Contracting with Entities that Require Certain Internal Confidentiality Agreements – Representation (DEVIATION 2015–02)”, and the contract Clause at FAR § 52.203–99, has the same name.
[4] “EPA Solicitation Clauses” available at http:--www2.epa.gov-grants-epa-solicitation-clauses.
[5] See General Services Administration Acquisition Bulletin No. 15-03 (March 18, 2015); General Services Administration CAAC LETTER 2015-02; U.S. Agency for Intl. Development, Acquisition & Assistance Policy Directive 15-01 (April 2, 2015); Dept. of Veterans Affairs Memorandum Re: Class Deviation (April 9, 2015).
[6] FAR Case 2015-012.
“Inside DOD Whistleblower Rule for Confidentiality Agreements,” by Albert B. Krachman and Stefanos N. Roulakis was published in Law360 on November 25, 2015. To view the article online, please click here.
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Data Analytics Grow in Contract Source Selection
Is big data coming to federal contract source selection? Yes, and contractors who master the systems early will reap the big rewards.
An increasing number of procurements are using numeric measures to establish either a competitive range or final awardees. The data points may be aggregated from a variety of variables, and the scoring on those data points will be processed by increasingly sophisticated models that attempt to predict the contractors most likely to succeed on the contract.
To read the full blog article, please click here.
“Data Analytics Grow in Contract Source Selection,” by Albert B. Krachman and Brian Friel was published in SIGNAL Magazine (blog) on February 3, 2016.
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The Justice Department’s Yates Memorandum and Three Tips for Government Contractors to Manage the Risks
The Department of Justice (“DOJ”) is setting its sights on individual accountability for corporate wrongdoing. That is the message that DOJ has been promoting following the recent internal memorandum issued by Deputy Attorney General Sally Quillian Yates, titled “Individual Accountability for Corporate Wrongdoing” (the Yates Memo), which relates to DOJ’s practices in conducting corporate investigations. Although the idea of holding individuals accountable for corporate wrongdoing is not new, the Yates Memo’s relative focus on individuals as part of corporate investigations suggests more scrutiny of individuals in civil and criminal investigations. This focus complements a well-documented increase in the suspension and debarment of individuals in recent years, and reinforces the heightened risks that business owners, executives, managers, and employees face throughout the government contracting community.
The Yates Memo presents a good opportunity for government contractors to review their compliance programs in the new year—and in particular their practices for conducting internal investigations—to ensure that they are actively managing the risks presented by this professed focus on individuals. This alert summarizes the Yates Memo and offers three tips to government contractors to consider in response.
The Yates Memorandum: An Overview
The Yates Memo emphasizes individual accountability for corporate wrongdoing, even where that does not result in more money recovered for the government. In the past, DOJ has often released individual liability after a large corporate settlement. This practice is unlikely to continue. To promote individual accountability in DOJ investigations, the Yates Memo sets out six guidelines: (1) to get any cooperation credit, companies must provide “all relevant facts” about the individuals involved in the alleged misconduct; (2) both criminal and civil investigations should focus—from the beginning—on individuals; (3) criminal and civil attorneys should coordinate their investigations; (4) corporate resolutions will not release individuals; (5) corporate investigations should not be resolved without considering the impact on individual investigations, especially with regard to the statute of limitations; and (6) the ability to pay a money judgment should not impact the decision on whether to bring suit against an individual.
These six guidelines were incorporated in November 2015 into a revised version of the United States Attorneys’ Manual and DOJ’s Principles of Federal Prosecution of Business Organizations. Both documents now reflect that DOJ should be holding individuals accountable for corporate wrongdoing, and that the focus on individuals should start at the beginning of an investigation.
Government contractors should pay special attention to the Yates Memo and related guidance as it raises a host of concerns, including how this “new” focus on individual accountability will impact internal investigations, mandatory disclosures, and the risks attendant to civil, criminal, and administrative proceedings.
Three Tips to Manage the Risks Presented by the Yates Memo
Though the ultimate practical impact of the Yates Memo remains to be seen, we suggest below several common-sense steps government contractors should consider taking now to help ensure they are adequately prepared for government investigations post-Yates Memo.
First, ensure your internal investigation practices adequately protect your corporate attorney-client privilege.
The Yates Memo sets higher expectations for the level of information the government requires regarding individuals. In this regard, the Yates Memo states that cooperation credit will no longer be offered unless companies “identify all individuals involved or responsible for the misconduct at issue, regardless of their position, status or seniority, and provide to the Department all facts relating to that misconduct.” This puts tremendous pressure on companies to quickly get to the bottom of who was involved in alleged misconduct, and may create greater tension in internal corporate investigations.
DOJ’s early focus on individuals will undoubtedly increase the prospect that companies and their employees have divergent interests much earlier in the investigation or disclosure process. This increases the importance of taking steps to protect corporate attorney-client privilege, paying close attention to information indicating individuals may have a need for separate counsel. As made apparent by the recent Barko cases (challenging privilege assertions in internal investigations), companies need to be proactive to protect their corporate attorney-client privilege. To this end, companies should consider several best practices for preserving privilege in internal investigations, including: (1) ensuring that counsel is actively participating in the investigation; (2) ensuring that investigation procedures make it clear that the purpose of the investigation is to seek or obtain legal advice for the company; (3) ensuring that all participants in the investigation are aware that the investigation is being directed by counsel and having counsel prepare or review the investigation findings; and, perhaps most importantly, (4) having counsel participate in all witness interviews and ensuring that all interviews contain appropriate Upjohn instructions.
Second, review your insurance coverage for government investigations.
The costs of government investigations can be staggering, particularly considering the costs of reviewing and producing documents and electronically stored information in response to often sweeping requests. These costs can be particularly damaging to smaller and mid-sized companies. The Yates Memo may compound these costs by increasing the prospect of parallel proceedings involving multiple individuals and corporate defendants. Contractors should review their insurance assets—including D&O insurance policies—to make sure that policy limits and policy language are adequate to cover their risk profile in this heightened enforcement environment. Among other considerations, severability provisions limiting knowledge to individual insureds for coverage purposes will be important to have in place. Contractors should also pay special attention to whether individual investigations may trigger reporting obligations under the definition of a “claim” within applicable policies.
Third, take the opportunity to assess the effectiveness of your compliance program.
DOJ’s increased focus on individuals means that companies could potentially have to deal with several parallel tracks in an investigation, particularly as the Yates Memo encourages parallel proceedings for individuals and companies both civilly and criminally. Additionally, the Yates Memo requires investigations to identify “all” individuals involved in misconduct. Such breadth of scope may increase the expense and burden of cooperating with an investigation.
These trends reinforce the benefit of an effective compliance program which can help prevent or promote early detection of issues that might trigger a disruptive and expensive government investigation. Companies should consider assessing the current adequacy of their programs, for example by measuring the frequency of hotline calls and how they are resolved, or by conducting a focus group through an independent third party to interview a cross-section of the workforce on how they perceive the culture of compliance at the firm. Periodically performing a risk assessment of your compliance program—and tailoring it accordingly—will help ensure your compliance program is positioned to get in front of the most significant risks your business is facing.
© 2016, Blank Rome LLP. All rights reserved. Please contact Blank Rome for permission to reprint. Notice: The purpose of this update is to identify select developments that may be of interest to readers. The information contained herein is abridged and summarized from various sources, the accuracy and completeness of which cannot be assured. This update should not be construed as legal advice or opinion, and is not a substitute for the advice of counsel.
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Contractors Must Address Expanding Human Trafficking Laws
With the increasing scrutiny on human trafficking, it has become more important than ever for government contractors performing work overseas to review their compliance programs to ensure that they have robust measures to prohibit, detect and promptly remediate such conduct. For example, on Feb. 1, 2016, the House of Representatives furthered anti-trafficking initiatives by advancing H.R. 400, the Trafficking Prevention in Foreign Affairs Contracting Act, which would require the U.S. State Department and the U.S. Agency for International Development to develop and implement comprehensive monitoring and compliance programs, including formalizing existing programs for tracking child abuse offenders, to prevent overseas contractors from engaging in human trafficking.
The House initiative comes on top of already existing, strict requirements and penalties that now also apply to subcontractors. Many companies may not be aware of recent expansions to these requirements, which now equally cover actions by subcontractors pursuant to mandatory flow-down provisions, apply those requirements to all contracts, including task and purchase orders issued under indefinite delivery, indefinite quantity contracts, and cover a much broader scope of potential violations.
The expansion of human trafficking laws to nearly all aspects of government contracting not only imposes substantial burdens on contractors, but also potentially renders them responsible for the actions of their subcontractors. Couple that with the serious consequences of noncompliance (such as contract terminations or administrative sanctions, including suspensions or debarments), and the risk profile has grown exponentially. It is, therefore, essential that contractors review their overseas operations, controls and practices to determine whether any enhancements are necessary to ensure compliance with these new requirements, as well as review and obtain proper assurances from subcontractors regarding the sufficiency of their systems and practices.
While a number of the foregoing requirements were established in 2012 by Executive Order 13627 and further in the 2013 National Defense Authorization Act, the requirements previously only applied on a contract-specific basis. However, with the recent addition of new requirements in the Federal Acquisition Regulation that apply to all solicitations, contracts and subcontracts, including all task and purchase orders, many more companies must now comply with human trafficking prohibitions or face potentially severe penalties. As amended, FAR 52.222-50(b) now not only prohibits “severe” forms of trafficking, but also less obvious conduct.
Whereas severe forms of trafficking cover egregious acts such as sex trafficking and recruiting or obtaining workers through the use of force, fraud, coercion, and involuntary servitude or slavery, the amended regulations now also encompass more subtle conduct. These include procuring commercial sex acts, withholding employee identity or immigration documents, such as passports and similar papers, using misleading or fraudulent recruitment practices, charging employees recruitment fees or using recruiters that do not comply with labor laws of their home countries, and providing housing which fails to meet the host country’s housing and safety laws.
To facilitate these requirements, the regulations now impose several requirements to protect workers’ rights. These include transporting foreign workers back to their home countries at the close of their employment, providing all work documents in a language and format that employees can understand and which, at a minimum, must describe the key terms of their employment (including a description of the work, wages, work locations, living conditions, and any benefits), providing a statement that recruiting fees are prohibited, explaining the grievance process available to employees, setting forth the content of applicable trafficking laws and regulations, and notifying all employees, representatives, and agents that disciplinary actions will be taken for any violations. See FAR 52.222-50(b), (c), (i).
Contractors and subcontractors must also: (1) certify compliance with all human trafficking requirements and procedures, implement a compliance plan, and after a diligence review, have no knowledge of violations by any employees, subcontractors or agents, or if so, appropriate disciplinary actions have been taken; and (2) make an “immediate” disclosure to the contracting officer and the agency Inspector General of any credible evidence of a violation received from any source, including the host country. See FAR 52.222-56(c) and FAR 52.222-50(d), respectively.
The certification requirements for both contractors and subcontractors could also form a basis for False Claims Act violations, because an incorrect certification could be construed as a false statement of compliance with human trafficking requirements in support of a claim for payment. Even without an express certification, the specter of FCA liability exists under more nebulous approaches, such as the implied certification theory. The validity of implied certification is the subject of a circuit court split and will be considered by the U.S. Supreme Court, which has granted cert in Universal Health Servs., Inc. v. United States, U.S., No. 15-7, cert. granted, Dec. 4, 2015. If the Supreme Court endorses the implied certification theory, it will substantially broaden the scope of the FCA, increase the potential for treating contract violations of human trafficking requirements as FCA violations, and expose contractors to potential treble damages and penalties under the statute.
The rapidly evolving regulatory landscape raises many significant compliance issues for both prime contractors and their subcontractors. First, the imposition of due diligence requirements may transform even negligent acts, as opposed to knowing or intentional conduct, into potential violations. Second, in contrast to the more flexible “timely” disclosure standard of the Mandatory Disclosure Regulations in the FAR, an “immediate” disclosure requirement suggests that contractors must make a disclosure before they have had the opportunity to conduct a fulsome investigation. Finally, with the enhanced focus on subcontractor compliance, prime contractors may find themselves in the difficult position of dealing with these issues on multiple fronts with their subcontractors, the government and the need to still complete contract requirements.
These dynamics present significant challenges for prime contractors because they potentially may be held responsible for violations by their subcontractors. In this regard, the regulations now impose surveillance requirements on contractors regarding their subcontractors in nearly every contract, which include developing a compliance plan to prevent subcontractors, at all tiers and dollar values, from trafficking in persons, which includes monitoring, detecting and terminating subcontractors that have committed violations. See FAR 52.222-50(h)(1). These enhanced monitoring requirements, with which prime contractors must comply to protect themselves from liability, may strain business relationships with their subcontractors. Given the substantial risks posed by the expanded human trafficking regulations, contractors performing work overseas should conduct a fulsome review of their current systems and procedures to ensure that both they and their subcontractors are in compliance with these new requirements.
“Contractors Must Address Expanding Human Trafficking Laws,” by Dave Nadler and David Yang was published in Law360 on February 17, 2016. To read the article online, please click here.
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Big Data Will Reshape Federal Procurement Policy
Several types of data may contribute to building a comprehensive picture.
The use of big data in source selection decisions for contract awards is growing. But big data also is shaping acquisition policy. One of the recent Defense Department Acquisitions System performance reports began, “In God we trust; all others must bring data.”
Federal acquisition policy has been cobbled together by Congress and executive branch policy makers over the past few decades with little actual data to back up the policies they’ve written. Big data is coming to federal procurement, and it will change the way policy is made.
To read the full blog article, please click here.
“Big Data Will Reshape Federal Procurement Policy,” by Al Krachman and Brian Friel was published in SIGNAL Magazine Blog on March 7, 2016.
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Ambiguities Cloud New Version of Cyber Defense Clause
More questions than answers affecting acquisition emerge from this revision.
Recently, the Defense Department began incorporating the December 2015 version of DFARS § 252.204–7012, titled “Safeguarding Covered Defense Information and Cyber Incident Reporting” in solicitations and contracts. Unfortunately, the revised clause contains some ambiguities that will make implementation more difficult.
In its broadest sense, the DFARS Cyber Security Clause requires contractors to: (1) provide adequate security of information systems in accordance with certain published standards; (2) investigate and report actual or apparent cyber breaches; (3) preserve affected media and systems; and (4) grant the Defense Department access to facilities and data for investigation and possible damage assessment. The clause contains multiple definitions of terms that specify to which data and systems the rules apply. The clause is dense and challenging to administer.
To read the full article, please click here.
“Ambiguities Cloud New Version of Cyber Defense Clause,” by Albert B. Krachman was published in SIGNAL Magazine Blog on April 6, 2016.
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DOD Expands Cyber Security Rules for Defense Contractors
Action Item: Through a new version of its Cyber Security Clause, the Department of Defense (“DOD”) is directing defense contractors to extend their cyber defense and reporting requirements beyond their recognizable supply chains. The new version arguably expands the contractor’s obligation to incorporate the clause in a host of other agreements critical to the contractor’s operations. This advisory recommends several strategies that defense contractors can employ to address the issue.
Recently the Department of Defense began incorporating the December 2015 version of DFARS § 252.204-7012, titled Safeguarding Covered Defense Information And Cyber Incident Reporting (Dec 2015) in solicitations. Contractors with awarded contracts should expect to see this version in modifications over the next several months.
Through the addition of a few words in the subcontractor flow-down provision, DOD is directing contractors to extend their cyber defense and reporting requirements beyond their recognizable supply chain for the contract. Under the previous version, the cyber security requirements just had to be flowed down to traditional subcontractors. The new version expands the contractor’s obligation to incorporate the clause in a host of other agreements defined as critical to the contractor’s operations.
The DOD Cyber Security Clause
In its broadest sense, the DFARS Cyber Security Clause requires contractors to: (1) provide adequate security of information systems in accordance with certain published standards, (2) investigate and report actual or apparent cyber breaches, (3) preserve affected media and systems, and (4) grant DOD access to facilities and data for investigation and possible damage assessment. The clause contains multiple definitions of terms that specify to which data and systems the rules apply. The clause is dense and challenging to administer.
The Enhanced Reach of the December 2015 Version
DOD has expanded the clause’s reach through a change in the subcontractor flow-down provisions. Under the prior version, the clause had to be flowed down to any firm which provided services or supplies for the performance of the prime contract. Most prime contractors can identify their subcontractors on a particular contract, and vice versa. Flowing down a Cyber Security Clause to known subcontractors is fair game. Theoretically, those vendors have an opportunity to study the clause and to price the compliance costs in their proposals.
Now the clause must also be flowed down to two new groups. The contractor must now flow down the Cyber Security Clause to parties with whom the contractor has a contractual instrument similar to a subcontract for (i) operationally critical support or (ii) if its performance of the subcontract will involve a “covered contractor information system.”
What is a contractual instrument similar to a subcontract? The clause does not define the term. Does this mean a license, a transportation tariff, a lease, a promissory note, a grant, a teaming agreement, an LLC Operating Agreement, or something else?
Notably, the government has the right to designate whether a particular company falls within the “operationally critical support” definition. This group is defined in DFARS §252.204-7012(a) to include companies in the transportation and logistical sectors, essential to contingency operations. This could prove challenging to administer. What if the counterparty doesn’t agree?
The second group reaches counterparties holding a subcontract-like instrument if subcontract performance will involve a defined type of contractor information system. This is a confusing formulation. It’s possible that this group could cover a much wider swath of counterparties, such as utility and internet providers, but it could also cover HVAC and physical security vendors. In other words, the changed clause arguably reaches a wide swath of the contractor’s business network beyond the traditional subcontractor class.
Strategies for Compliance
Assuming DOD does not clarify or limit the clause in the near future, there are a number of strategies contractors can employ to address the issue. First, active offerors should check their solicitations to see which version of the clause has been incorporated into the contract terms. If the December 2015 version is in the contract, they should use the Solicitation Q&A process to gain clarification. Contractors might have success in obtaining government agreement to confine the clause’s reach to a narrowly defined list of vendors, and-or to approve “best efforts” language. Contractors should do a self-assessment to identify which members of their supply chain and beyond could be characterized as operationally critical to their performance. It might also be prudent to send the clause to potentially affected vendors and ask them to comment on compliance and to provide information on how their prices and-or terms of service would change to account for the compliance burden.
One could argue that this enhanced cyber security clause is designed to begin the process of injecting military-standard cyber security into the private sector through defense contractors. Defense contractors do play a unique and expanding role in the military, so there could be a rationale for applying this extension to this business line. Then again, use of federal contracts to effect leading edge business process changes is a time honored convention.
©2016 Blank Rome LLP. All rights reserved. Please contact Blank Rome for permission to reprint. Notice: The purpose of this update is to identify select developments that may be of interest to readers. The information contained herein is abridged and summarized from various sources, the accuracy and completeness of which cannot be assured. This update should not be construed as legal advice or opinion, and is not a substitute for the advice of counsel.
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The Lessons of Section 508 in the iPhone Encryption Debate
The Department of Justice’s dismissal of its reverse-encryption suit against Apple marks the start, not the end, of a public-private negotiation on the accessibility of information. But few recall that we have seen this movie before, albeit in a slightly different form.
About 18 years ago, some sectors of the technology industry questioned the federal government’s mandate to force manufacturers to make technology accessible to disabled individuals. The accessibility law, which became known as Section 508, appeared to subject the electronic and information technology (EIT) industry to several burdensome compliance requirements to make EIT accessible to the disabled. Federal contracts were on the leading edge of imposing these requirements on federal vendors.
To read the full article online, please click here.
“The Lessons of Section 508 in the iPhone Encryption Debate,” by Albert B. Krachman was published in the Washington Business Journal on May 6, 2016.
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False Claims Act Penalties Will Substantially Increase under New Interim Final Rule
Action Item: Government contractors must carefully reassess their exposure under the False Claims Act due to substantial increases in civil penalties.
Pursuant to the Bipartisan Budget Act of 2015 (the “Budget Act”), on May 2, 2016, the U.S. Railroad Retirement Board (the “Board”) issued an interim rule, which will take effect on August 1, 2016, nearly doubling current False Claims Act (“FCA”) civil penalties. While the Budget Act requires all federal agencies with jurisdiction over the FCA to issue rules adjusting the civil penalty amounts by July 1, 2016, we can expect similar increases by the Department of Justice (“DOJ”) and other applicable federal agencies. Though the rationale for increases—adjustments for inflation—may seem harmless on the surface, they will have a profound impact on the exposure to government contractors in FCA cases nationwide. A copy of the rule can be found here.
The Board’s new rule increases the minimum and maximum per claim FCA penalties from $5,500 to $10,781 and $11,000 to $21,563, respectively. The Board construed the Budget Act as warranting an inflationary adjustment of 198% over the current penalty range. Setting to one side the propriety of increasing punitive civil penalties in a fraud statute for inflation, we can expect DOJ and other federal agencies to follow suit with similar adjustments. In doing so, the prior penalty range, which already was significant, could now be crushing.
While FCA cases typically focus on the treble damages available under the statute, the civil penalties portion of the statute, which are mandatory if the contractor is found liable at trial, can easily eclipse potential or actual damages and must be imposed even if no damages have been proven. Indeed, in some cases, where damages may be nonexistent or difficult to prove, the government or qui tam relators may seek to pursue only penalties and forgo damages at trial. For example, in United States ex rel. Bunk v. Gosselin World Wide Moving, N.V., the Fourth Circuit affirmed $24 million in penalties even though the relators proved no damages and the government had paid only $3.3 million for the shipping services at issue.
As the FCA imposes liability on each false claim submitted, federal contractors in volume-based industries where claims can number in the thousands, such as shipping, healthcare, medical devices, IT, and routine commodities (such as office supplies), will bear the brunt of these changes, as the number of claims in these sectors can quickly surpass any damages that a plaintiff may be able to prove or which may even be at issue. In such cases, the civil penalties alone, even at the lowest range of the scale, can quickly outpace any damages by several orders of magnitude. The penalty increases will give the government and relators even more leverage than they already possess in FCA cases, may incentivize more suits, and may, due to the increased risks, encourage more settlements by contractors in cases that are really contract disputes rather than fraud. While this, and the forthcoming increases in civil penalties by other agencies, may finally violate the Eighth Amendment’s restrictions against excessive fines, such challenges have not historically been successful under the FCA. Accordingly, by dramatically increasing the monetary exposure to government contractors in false claims cases, the Board’s new rule under the Budget Act could be the latest catalyst that reshapes the FCA landscape.
©2016 Blank Rome LLP. All rights reserved. Please contact Blank Rome for permission to reprint. Notice: The purpose of this update is to identify select developments that may be of interest to readers. The information contained herein is abridged and summarized from various sources, the accuracy and completeness of which cannot be assured. This update should not be construed as legal advice or opinion, and is not a substitute for the advice of counsel.
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SBA Looks to Dramatically Expand Its Mentor-Protégé Program
We now appear on the verge of a transformative expansion, some six years in the making, of the Small Business Administra­tion’s mentor-protégé program that may change the entire landscape of mentor-protégé programs in federal procurement. The SBA has long main­tained a mentor-protégé program that allows large “mentor” businesses to provide technical, man­agement and financial assistance to small “pro­tégé” businesses. The program is designed to help protégés win and successfully perform Govern­ment contracts and subcontracts, leveraging the expertise and resources of mentor partners. The program also allows mentor businesses to support small business contracts for which they would not otherwise be eligible. But under existing law, only a small portion of small businesses—those that qualify for the SBA’s 8(a) Business Development program—are allowed to participate as protégés under the SBA program. That is about to change dramatically.
To read the full article, please click here.
“SBA Looks to Dramatically Expand Its Mentor-Protégé Program,” by Justin A. Chiarodo and Adam Proujansky was published in The Government Contractor (Vol. 58, No. 21), a Thomson Reuters Publication, on May 25, 2016. Reprinted with permission.
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Human Trafficking Regulations to Be Updated to Define “Recruitment Fees”
Action Item: Government Contractors should be aware of how a new proposed definition of the term “recruitment fees” in the human trafficking clause will impact their hiring practices and should prepare now for compliance.
In the latest regulatory action targeted at human trafficking, the Federal Acquisition Regulatory Councils (“FAR Councils”) on May 11, 2016 issued a proposed rule to include a sweeping new definition of the term “recruitment fees.” The proposed definition would cover nearly any conceivable charge related to recruiting, hiring, and onboarding of employees, no matter the location of the employee, the skill level of the job, or customary business practices in the industry. Contractors should pay close attention, given that the rule also makes them responsible for recruitment fees collected by third parties, including subcontractors at all tiers, recruiters, and staffing firms.
Recognizing the far-reaching consequences the rule will have, the FAR Councils have flagged key open questions for contractors to comment upon. Given the potential sweeping change, contractors should think carefully about how the proposed rule will impact their hiring practices.
The Proposed Definition
Though the human trafficking clause, FAR 52.222-50, has been lauded for advancing important policy objectives since it went into effect in January 2015, its prohibition on recruitment fees has come under fire from the U.S. Government Accountability Office, Congress, and many contractors for being overly vague. The new proposed definition of recruitment fees will add much needed clarity in this area, although its sweeping breadth may also disrupt ordinary contractor hiring practices that may have never been thought to constitute human trafficking.
The proposed definition prohibits nearly any charge to an employee or potential employee—no matter the form—that is associated with the recruiting or hiring process. Covered items included charges for:
Soliciting, considering, interviewing, referring, retaining, transferring, selecting, testing, training, providing new-hire orientation, recommending, or placing employees or potential employees;
Advertising;
Any activity related to obtaining permanent or temporary labor certifications;
Processing petitions;
Visas and any fee that facilitates an employee obtaining a visa such as appointment and application fees;
Government-mandated costs such as border crossing fees;
Procuring photographs and identity documentation, including any nongovernmental passport fees;
Items that are a condition of access to the job opportunity, such as procuring medical examinations and immunizations, obtaining background, reference, and security checks and examinations, or obtaining additional certifications;
An employer’s recruiters, agents or attorneys, or other notary or legal fees; and,
Language interpreters or translators.
Key Takeaways for Contractors
In addition to its broad scope, the proposed rule is noteworthy because it makes contractors liable for fees collected by third parties, including agents, recruiters, staffing firms, subsidiaries and affiliates of the employer, any agent or employee of such entities, and subcontractors at all tiers. Thus, the major takeaways for contractors are that the U.S. Government expects you to root out illegal human trafficking practices at all tiers of your supply chain and that nearly any conceivable charge in connection with the recruiting or hiring of employees cannot be passed through to the employee.
An open question is whether the proposed rule strikes the right balance. The FAR Councils have highlighted the following issues (among others) for public comment:
Are all costs and fees associated with bringing an employee on board properly treated as recruitment fees?
Are there any additional charges that should be considered recruitment fees?
Should the definition of a recruitment fee vary depending on whether the job is a professional high-paying, high-skill job or an unskilled, low-paying job? Is the location of the job a factor?
These are important questions that contractors would be well-advised to carefully consider and comment upon before the final rule is issued.
While the definition may be appropriate in the context of overseas work involving unskilled or lower-paying jobs, the rule is not limited to those circumstances. Thus, contractors should consider how it will impact other practices, such as the hiring of professionals who may routinely pay to maintain their own professional certifications or permitting applicants to pay optional government fees to expedite visa or passport applications. Contractors should also think carefully about how to revamp their hiring practices to better ensure their own employees and those in the rest of their supply chain are recruited and hired in a manner consistent with these policies.
©2016 Blank Rome LLP. All rights reserved. Please contact Blank Rome for permission to reprint. Notice: The purpose of this update is to identify select developments that may be of interest to readers. The information contained herein is abridged and summarized from various sources, the accuracy and completeness of which cannot be assured. This update should not be construed as legal advice or opinion, and is not a substitute for the advice of counsel.
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One of the 50 Ways to Lose a Contract
The devil is in many details.
The number of ways a federal bidder can lose a contract award on an otherwise winning proposal is mind boggling. The Government Accountability Office (GAO) has sustained hundreds of protests on issues such as late proposals, proposals sent to the wrong location, proposals missing required attachments, proposals failing to acknowledge amendments, unsigned proposals, proposals containing typographical errors and others.
Most of these problems would be overlooked in the commercial world, but the rigid rules of federal procurement leave virtually no margin for error. Some commentators argue that the rigid rules are nonsensical, they improperly raise form over substance and they deprive the government of the best value over inane technicalities. This probably is a correct view, and it is clear the rules are in need of modification. In the meantime, the trees keep falling.
To read the full article, please click here.
“One of the 50 Ways to Lose a Contract,” by Albert B. Krachman was published in SIGNAL Magazine Blog on June 6, 2016.
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MAINBRACE: JUNE 2016 (No. 3)
To read the full text of the articles in the June 2016 edition of Mainbrace, please download the PDF.
ARTICLES
A Note from the Editor
by Thomas H. Belknap, Jr.
Thank you. Everyone appreciates acknowledgement for hard work and a job well done. It’s human nature. An occasional pat on the back makes us feel good about what we are doing, and it makes us strive harder to earn the recognition we receive. (Read more)
What You Need to Do Now to Prepare for the New SOLAS Verified Gross Mass Deadline
by Jonathan K. Waldron, Patricia M. O'Neill, and Dana S. Merkel
As the July 1, 2016, effective date for the SOLAS Regulation VI-2 amendments quickly approaches, unanswered questions and difficulties complying with varied international and domestic implementations loom large. (Read more)
The Right to Countersecurity from a Debtor in Bankruptcy
by Thomas H. Belknap, Jr. and Michael B. Schaedle
United States maritime law offers a maritime plaintiff two principal means of obtaining security for its claims: Rule B attachment in respect of maritime claims, and Rule C arrest in respect of maritime liens. These rules are superficially similar, but each has different criteria and serves a different purpose. (Read more)
U.S. Export Controls Pose Risks for Offshore Energy Companies’ Return in Iran
by Matthew J. Thomas
In March, Blank Rome co-hosted a breakfast seminar in Dubai with Fichte & Co Legal Consultancy to discuss with local shipping and energy professionals the real risks and opportunities presented by the rollback of international sanctions on Iran. We were awed by the warm reception we received, the huge turnout (well over 250 clients and friends), and by the insightful questions and contributions of those who joined us. (Read more)
Meet Blank Rome’s Government Contracts Practice
by David M. Nadler and Brian S. Gocial
Regular readers of Mainbrace know that Blank Rome LLP has the largest and most comprehensive maritime legal practice in the United States, providing unparalleled knowledge and counsel to our maritime industry clients. With the recent addition of more than 100 attorneys from Dickstein Shapiro LLP’s New York and Washington, D.C., offices, Blank Rome now offers our maritime clients a nationally recognized, full-service government contracts practice. (Read more)
DOJ Announces FCPA Pilot Program in an Effort to Incentivize Companies to Self-Report Misconduct
by Shawn M. Wright, Carlos F. Ortiz, Steven J. Roman, Ariel S. Glasner, and Mayling C. Blanco
On April 5, 2016, the chief of the Fraud Section for the U.S. Department of Justice’s (“DOJ”) Criminal Division issued a memorandum related to the DOJ’s prosecution of violations of the Foreign Corrupt Practices Act (“FCPA”). (Read more)
New China-Liberia Maritime Bilateral: Savings on Port Fees Just One Element of Broader Trade Cooperation
by Matthew J. Thomas
In a November 2015 state visit in Beijing, the leaders of the People’s Republic of China and the Republic of Liberia signed a historic bilateral maritime agreement offering significant benefits to Liberian shipowners. Headlines on the bilateral highlighted the immediate economic impact of the agreement. (Read more)
Top Ten Bid Protest Considerations for the Maritime Industry
by David M. Nadler
It is no secret that federal procurement spending has dropped considerably in recent years. With fewer dollars being spent and fewer procurements, government contractors in the maritime industry are increasingly turning to the bid protest process for a second chance to compete for, and hopefully win, new contracts, and preserve their incumbent contracts. (Read more)
NOTEWORTHY NEWS
Blank Rome Wins Lloyd’s List 2016 Maritime Legal Services Award
Blank Rome was recognized as the winner of the Lloyd’s List 2016 North American Maritime Award for “Maritime Services – Legal,” which is awarded “for exceptional achievement or contribution to any service sector of the North American maritime industry by a company, individual or organisation.” (Read more)
Chambers USA 2016 Honors Blank Rome Maritime Attorneys and Practices
Blank Rome is pleased to announce that its practice groups and attorneys have again been ranked by Chambers USA. The 2016 edition of Chambers USA recognized Blank Rome in a number of categories, and also ranked 73 Blank Rome attorneys as “leaders in their fields." (Read more)
Chambers Global 2016 Ranks Blank Rome Attorneys and Shipping Litigation Practice
Chambers Global 2016 recognized Blank Rome LLP as a global leader in Shipping: Litigation, as well as Partners Anthony B. Haller and John D. Kimball for their industry knowledge and leading practices. (Read more)
Former U.S. Energy Secretary & DOE Chief of Staff Join Blank Rome Government Relations
Blank Rome Government Relations LLC (“BRGR”) is pleased to announce that the Honorable Spencer Abraham, former U.S. Secretary of Energy and former U.S. Senator from Michigan, and Joseph P. McMonigle, former Vice-Chairman of the International Energy Agency and former Chief of Staff at the U.S. Department of Energy, have joined Blank Rome Government Relations as Principals in the Washington, D.C., office. (Read more)
Risk Management Tools for Maritime Companies
Blank Rome’s maritime and international trade practice group has developed a Compliance Review Program, Maritime Cybersecurity Review Program, and Trade Sanctions and Export Compliance Review Program to help clients mitigate their escalating risks in the maritime regulatory environment; protect their property and reputation from the unprecedented cybersecurity challenges present in today’s global digital economy; and ensure that companies in the maritime, transportation, offshore, and commodities fields do not fall afoul of U.S. trade law requirements. (Read More)
© 2016 Blank Rome LLP. All rights reserved. Please contact Blank Rome for permission to reprint. Notice: The purpose of this update is to identify select developments that may be of interest to readers. The information contained herein is abridged and summarized from various sources, the accuracy and completeness of which cannot be assured. This update should not be construed as legal advice or opinion, and is not a substitute for the advice of counsel.
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A Glimmer of Hope in DCAA's FY 2015 Report to Congress
Fiscal year 2015 was a productive year for the Defense Contract Audit Agency. In its annual report to Congress, the DCAA reported that it examined $257.5 billion in contract costs, issued 4,546 audit reports, identified $11 billion in audit exceptions, obtained $3.1 billion in net savings, and produced a return on investment of approximately $4.8 for every $1 of taxpayer money spent.
Compared to FY 2014 figures, these statistics show that the DCAA is making progress in clearing its audit backlog. For example, whereas in 2014 incurred cost audits took an average of 1,006 days to complete, this figure was down 22 percent to 883 days in 2015. Likewise, the number of pending incurred cost audits decreased by 18 percent from FY 2014 figures, due in part to the DCAA’s closure of 9,400 incurred cost years. And, while the DCAA’s 2015 return on investment is lower than the $6.8 to $1 ratio in 2014, much of the difference is due to the exclusion of forward pricing rate audits from the calculation. Indeed, the DCAA’s sustainment rate in questioned costs increased by 4 percent from 46.4 percent in 2014 to 50.6 percent in 2015.
However, it remains to be seen whether the DCAA can sustain this momentum, especially in connection with the closure of incurred cost audits — its primary mandate. Although the DCAA closed out 4,546 audits reports in 2015, only 1,925 were incurred cost audits, with the rest consisting of forward pricing, special and other audits. Moreover, while the average time for closing incurred cost audits decreased by 22 percent, it is unclear what led to the decrease — including whether the closure of smaller and simpler audits drove the reduction. Indeed, given the chronic budget constraints that have resulted in a hiring freeze and left the DCAA understaffed by 252 auditors from FY 2014 levels, it is difficult to see how the DCAA can sustain the gains reported in 2015. These challenges will likely only deepen in 2016 and beyond. The agency has disbanded dedicated incurred cost teams and its funding could be further reduced by up to another 8 percent in the coming fiscal year. In addition, the DCAA must continue to review and approve contractor business systems, while maintaining its progress on audit functions. With resources already stretched thin, these competing priorities call into question whether the DCAA’s productivity will stagnate.
Perhaps due to these constraints, and coupled with an ever growing workload, the DCAA engaged in more outreach efforts with industry in 2015 to improve processes and enhance efficiency. For major contractors, the DCAA explored initiatives of using data already prepared for Sarbanes-Oxley purposes in DCAA audits, as well as analytical pilot programs with contractors on ways to streamline data requests and improve current methods for collecting and reviewing data. Likewise, the DCAA has continued efforts to clarify its audit expectations with small business contractors, including providing training and guidance to that community on common issues to provide a clearer and more uniform audit process. These positive efforts should aid the DCAA in more efficiently handling its workload. Indeed, in a departure from prior reports, which identified the lack of access to contractors’ business systems as the barrier to productivity, the 2015 report’s emphasis on industry partnership tacitly recognizes that the true impediment is the lack of internal resources within the DCAA to keep pace with audit demands.
Nevertheless, the DCAA’s increased outreach efforts may be insufficient to continue improving productivity and ward off stagnation. Unless substantially more funding is made available, the DCAA will need to re-evaluate its current audit processes and priorities and investigative new ways of doing business. In this regard, the DCAA itself has proposed that performing some degree of audit functions on an established, continuous and recurring basis would reduce bottlenecks as potential issues or areas of noncompliance would be identified sooner and, thus, facilitate the closure of audits by avoiding unnecessary delays. Unfortunately, as the DCAA acknowledges, even though this initiative promises to improve efficiency, it will be difficult to implement given the lack of adequate funding and resources available to the agency.
Accordingly, the DCAA may need to resort to other options to mitigate these obstacles. For example, the DCAA may need to reassess whether and to what degree it should be questioning costs and conducting risk assessments with an eye toward whether those efforts will ultimately be material to audit findings or conclusions. The DCAA may also need to re-evaluate its measure of productivity, such as whether it should move away from broader metrics such as returns on investment or the average total days to closing an audit to more specific baselines such as the number of reports completed by each auditor in a given year or period. Finally, the DCAA may need to prioritize incurred cost and forward pricing rate audits ahead of the special and other audits that the DCAA performs on behalf of other agencies for investigation purposes. Indeed, from an efficacy standpoint, the closer in time the DCAA can get to pending incurred cost audits, the more likely the agency will be able to collect better data, reduce contractor burdens, and identify issues that may impact future audits.
In sum, while FY 2015 proved to be a more productive year and demonstrated a positive commitment by the DCAA to work with industry, it is unlikely that these actions will be sufficient to maintain, let alone improve upon, the progress made by the DCAA last year. To ensure that productivity does not stall and that it will meet its audit mandate, the DCAA will need to review its current practices and policies in this challenging political and budgetary environment to make hard choices on priorities and identify new ways of working with industry to streamline the audit process.
“A Glimmer of Hope in DCAA's FY 2015 Report to Congress,” by David M. Nadler and David Yang was published in Law360 on June 17, 2016. To read the article online, please click here.
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Air Force Utility Privatization Saves Real Money
The Air Force utilities privatization program has realized significant savings for the government, while also encountering some regulatory growing pains. Recent project accomplishments include saving $19.3 million in natural gas costs per year at a $1.1 million transaction cost, reducing water consumption by 28 percent, and reducing electric system outages by almost 40 percent. The program has saved the Air Force an estimated $520 million over the 50-year life cycle of projects, compared to continued government ownership.
With the current Department of Defense focus on energy security, this is good news. But the program still faces some open issues in the areas of labor standards and terminations that will need to be resolved in the future.
There are 270 Air Force utility systems left to evaluate for privatization. Because of the program’s success, the Air Force is adjusting the intake of new systems for evaluation so that it can match procurement resources with the number of systems in review.
The Air Force has recognized maintenance, operations and upgrades of the four main utility systems, electric, natural gas, sewer and water, are not a core competency and, where appropriate and cost effective, should be privatized.
The Air Force had approximately 159 “privatized” or owned-by-others utility systems before the Congressional utilities privatization authorization, Title 10 U.S.C. § 2688, in 1998. The majority of these legacy systems are with airport authorities where National Guard bases resided or on overseas installations in host nations under Status of Forces Agreements.
Congress enacted Title 10 U.S. Code §2688 to provide statutory authority for the service secretaries to solicit and transfer ownership of Defense Department utility system infrastructure. It allows the Air Force to transfer ownership of existing utility distribution systems to private, municipal, regional, district, or cooperative utility companies or other entities where such conveyance demonstrates long-term economic benefits. Procurement of the underlying commodity is not part of utilities privatization.
Subsequently, DoD issued direction to the service secretaries to privatize utility systems. These directives were based on two premises: Utility system ownership and its associated operation and maintenance is not a DoD core competency, and utility systems on DoD installations must be restored to, and reliably maintained at, industry standards. Using the various policies and guidance, the Air Force has privatized 68 installations.
To reach a decision to privatize, the Air Force uses a two-step process. The first step is a Federal Acquisition Regulation Part 41 contract process. The second part is a decision to convey (transfer ownership permanently) to the successful offeror based upon economics. The question is whether it is cheaper in the long run to privatize, or to maintain government ownership of a utility system.
The key metric used under the privatization program is the government’s “should-cost” estimate. This is the cost the government would incur to restore and maintain the system to industry standards. The should-cost figure is ultimately compared to the offers the Air Force receives after solicitations are issued through the standard Federal Acquisition Regulation process. The Air Force evaluates the received proposals and makes a determination as to whether or not it’s more cost-effective to divest the system.
Currently, there are 64 (out of the 270 left to evaluate) systems in some stage of the privatization analysis. The chart below shows the total number of systems at the various stages of the privatization analysis.
Because of the 2013 budget sequestration, the Air Force has imposed a strategic pause on new utilities privatization starts. The Air Force expects to lift the pause in the near future once funding is realigned to support new awards.
Developing a utilities privatization solicitation is a time-consuming effort because every utility system has unique characteristics totally dependent on where, when and how it was installed. Also, some state laws may require state-specific terms to be included in a request for proposals. The process starts with creating an inventory list of all the components that make up each system. This takes about six months. Then, the utilities privatization project management office works with the Defense Logistics Agency Energy, the centralized contracting office for the Air Force and Army programs, to create a request for proposals. DLA Energy distributes the proposal request using FedBizOpps.
After the proposal release, DLA Energy hosts a kickoff meeting at the base to acquaint the potential responders to the systems being privatized, to solicit questions about the inventory and the RFP. DLA will answer those questions as a single reply to all interested parties. The interested parties then decide if they want to submit a proposal.
DLA Energy establishes a proposal submission suspense date. Once proposals are received, it manages the evaluation process with technical support from the utilities privatization office. The agencies then deliver formal presentations to the source selection authority. The SSA is the person responsible for making the final award decision.
Near the end of the evaluation process DLA Energy will ask for final proposal revisions from each respondent. If the SSA decision is to award and the economics are favorable for conveyance, the new system owner, in concert with the base, starts a transition period that can last from six to 18 months. Once a bill of sale is signed, the contract starts and the base and the contractor begin a 50-year relationship to maintain, operate and upgrade the privatized system.
Sometimes, unique issues arise. As the program was beginning, there were unresolved questions on whether the only bidders eligible for privatization awards were holders of the state utility franchises covering the installation’s location. Disputes have also arisen over the government’s responsibility to compensate the contractor for improvements after a termination. Also, most proposals include exceptions or qualifications that must be negotiated.
The competitive acquisition process can take time before the SSA makes a decision. Since many of these 50-year contracts can be worth over $200 million, the agencies step cautiously through the entire process to ensure best value for the taxpayer.
Historically, the rate of successful awards was only 25 percent of evaluated utilities. Officials are confident that the award rate should go over 60 percent in the next few years. Last year, the Air Force award rate was 50 percent, and it is expected to be the same in 2016.
The application of the Davis-Bacon Act, which requires contractors and subcontractors to pay locally prevailing wages, has been a problem, but efforts are underway to address the issues. The reporting requirements of this law can be a major burden for small entities, such as rural electric cooperatives, resulting in some co-ops having second thoughts about competing.
There are also questions of insurance and liability. Bases have been hit by catastrophic events such as a Hurricane Sandy and Katrina, and responsibility for service restoration or catastrophic loss is an important issue. While privatized utilities have demonstrated faster recovery times from those disasters, working through recovery plans is sometimes a complicated piece of the negotiations.
Termination for convenience exposure is also considered on a case-by-case basis. The Air Force does an upfront cost estimate for convenience terminations based strictly upon the contractual requirements. In case of actual termination due to Base Realignment and Closure or other circumstances, there can be legal issues.
Despite some pre-conceived notions that some contracts may be tailored for the local area utility, there is actually healthy competition in most cases. The Air Force has worked with industry members over the years to improve their processes, and industry has improved their proposals. The Air Force has found that the newer proposals are more realistic and more in line with available budgets, helping to increase the rate of successful awards.
If a competitive award is not made, the Air Force is required to evaluate the local provider for the potential to make a sole source award using a similar FAR-based contract decision and economic conveyance decision.
Capturing data for privatization metrics is a new effort. The Air Force is working on creating metrics to determine improvements in system reliability and evaluate them across the entire Air Force privatized utilities portfolio.
“Air Force Utility Privatization Saves Real Money,” by Al Krachman and Richard Weston was published in the July 2016 edition of National Defense Magazine. To read the article online, please click here.
Al Krachman is a senior partner at Blank Rome LLP, whose practice includes utility privatization transactions and litigation. Richard Weston is the Air National Guard liaison to the Air Force Civil Engineer Center, at Tyndall Air Force Base, Florida. His office evaluates all of the Air Force utility systems for privatization.
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World Bank Provides New Insights into Its Sanctions System
The World Bank’s Office of Suspension and Debarment (“OSD”) recently released its latest “Report on Functions, Data and Lessons Learned.” The report provides important new insights into the World Bank’s sanctions system.
In recent years, the World Bank has enhanced its campaign to detect and punish fraud and corruption occurring in connection with World Bank-financed projects. The centerpiece of that campaign is the administrative sanctions process established by the World Bank.
That process starts with the World Bank’s integrity vice presidency (“INT”), which investigates any allegations of fraudulent, corrupt, collusive, coercive or obstructive practices in the performance of a World Bank project. The OSD then evaluates the information gathered by the INT and, if it deems the evidence sufficient, has the power to issue a notice of sanctions proceedings and recommend an appropriate sanction. There are five possible sanctions: debarment with conditional release, debarment for a fixed period without conditional release, conditional nondebarment, public letter of reprimand, and restitution. According to the World Bank’s recent report, the sanction most often recommended is debarment with conditional release.
At the time the notice of sanctions proceedings is issued, the OSD has the authority to temporarily suspend the contractor from eligibility to be awarded World Bank-financed contracts. The report notes that in most situations in which a notice of sanctions proceedings was issued, a temporary suspension was also imposed. The report states that the OSD has imposed temporary suspensions on over 300 firms and individuals in the last eight years, including 54 in the most recent fiscal year.
If the respondent chooses not to contest the allegations or the recommended sanction, then the sanction proposed by the OSD is imposed. If the respondent chooses to contest the allegations or the recommended sanction, it files a response, called an explanation, within 30 days of the notice of sanctions proceedings. According to the report, respondents filed explanations in only about one-third of cases. If an explanation is filed, the OSD may decide to dismiss the case, refer the case back to the INT, or revise the recommended sanction, based on the evidence and argument provided in the explanation. Otherwise, the OSD goes forward with the sanction proceeding.
The report reveals that the OSD has rejected only 4 percent of the cases brought by the INT in their entirety. It also states that the OSD has referred 36 percent of cases back to the INT for revision — either because there was insufficient evidence as to some claims brought against all respondents, or because there was insufficient evidence against some respondents in a multirespondent case. Thus, the OSD has proceeded with the vast majority of cases submitted to it by the INT.
The respondent may, within 90 days from the delivery of the notice of sanctions proceedings, appeal the case to the World Bank’s Sanctions Board. The Sanctions Board is composed of three bank staff members and four nonbank members. The chairman of the Sanctions Board must be an individual who has never been employed by an organization in the World Bank Group. The Sanctions Board reviews cases de novo and may hold hearings. If the Sanctions Board determines that one or more sanctionable practices occurred, it may impose a penalty. The Sanctions Board is not bound by the recommendation of the OSD. Decisions of the Sanctions Board are not appealable. In an effort to promote transparency, the World Bank publishes decisions of the Sanctions Board on its website. According to the report, 67 percent of the cases in which sanctions proceedings went forward were resolved by the OSD, while in the remaining 33 percent of cases, appeals were taken to the Sanctions Board.
In total, the report states that 368 firms and individuals were debarred or otherwise sanctioned in the fiscal year 2008-2015 period. The majority were debarred or otherwise sanctioned during the most recent part of this time period, suggesting that the pace of sanctions activity is increasing.
The World Bank’s sanctions procedures also provide that a party can seek settlement at any time in the sanctions process, and that a party seeking settlement can obtain a stay of sanctions proceedings for 60 days to conduct settlement negotiations with the INT. The stay of proceedings may be renewed by mutual agreement of the respondent and INT. Although the World Bank’s settlement process offers the opportunity for a quicker resolution, in practice the terms that the World Bank has imposed in connection with settlements have been onerous.
For example, in 2009, the bank entered into a settlement with Siemens AG pursuant to which Siemens agreed to a voluntary restraint on bidding for World Bank projects for two years, a four-year debarment of its subsidiary, and a payment of $100 million over the next 15 years to support anti-corruption work. In 2012, the bank entered into a settlement with C. Lotti and Associati Societa’ di Ingegnaria SpA, an Italian company, pursuant to which the company agreed to pay $350,000 restitution and accept a debarment with conditional release. According to the report, a total of 52 cases brought during the last eight years resulted in settlement agreements. The majority of these settlements occurred during the most recent part of the time period covered by the report, suggesting that settlement activity may also be increasing.
In the event that the sanction imposed — as a result of a decision by the OSD or Sanctions Board, or of a settlement with the INT — is debarment with conditional release (the most frequent sanction, according to the report) or conditional nondebarment, the World Bank’s integrity compliance officer (“ICO”) will counsel respondents regarding the establishment and implementation of an integrity compliance program. The ICO is empowered to impose any requirements it deems reasonably necessary, including periodic reporting by the sanctioned party, the appointment of an independent monitor, external auditing, and inspection of books and records. The ICO will also render a decision on the World Bank’s behalf regarding whether the sanctioned party has complied with the conditions for nondebarment or release from debarment. The report notes that the World Bank has developed detailed guidance on the conditions for release from debarment, and that these conditions focus on the debarred party demonstrating the adequacy of its integrity compliance program.
The report also states that, in most cases, debarments imposed by the World Bank have been recognized by other multilateral development banks (“MDBs”). In particular, due to a 2010 agreement between the World Bank, the African Development Bank, the Asian Development Bank, the European Bank for Reconstruction and Development, and the Inter-American Development Bank, an individual or firm debarred for more than a year by one MDB will in most cases be cross-debarred by the other MDBs.
Another interesting aspect of the report is the statistical breakdown of cases by type of sanctionable practice. This analysis revealed that the vast majority of cases — 83 percent — involved allegations of fraud. Only 18 percent involved corruption, 8 percent collusion, 4 percent obstruction, and 1 percent coercion. (The total percentages exceed 100 percent because some cases involved more than one sanctionable practice.) Of the cases involving fraud, about half involved forged third-party documents (e.g., bank guarantees, manufacturer’s authorizations, and performance or experience documentation), while most of the remainder involved misrepresentations by the respondent involving invoices, payment certifications, conflicts, past performance, or future performance.
In sum, the report enhances the public’s and practitioners’ understanding of the World Bank’s sanctions process. For example, one lesson from the report is that the World Bank has ramped up its enforcement activities in recent years. Therefore, companies that wish to continue working on World Bank projects would do well to adopt rigorous compliance regimes to ensure that they do not give the World Bank any basis to suspect that they have engaged in wrongdoing, and to make it easier for the company to defend its position if any allegations of wrongdoing are made. Because the report shows that the majority of the cases in which sanctions are imposed relate to companies’ use of allegedly forged documents, and misrepresentations made by the companies themselves on invoices and certifications, companies’ compliance programs should focus in particular on preventing these frequent types of wrongdoing.
The report also suggests that the bank may be increasingly interested in settling sanctions cases. For companies, the main advantages of settlements are that they result in a speedier resolution to the sanctions process, provide the company with certainty, and offer at least the possibility of leniency in the imposition of sanctions. However, even in settlements, the World Bank has often insisted on the imposition of onerous conditions, including periods of debarment, substantial restitution, and the implementation of comprehensive compliance programs. The compliance programs may include third-party monitors, who provide the bank with compliance performance reports, and impose a significant amount of World Bank oversight on the company. In addition, companies may be required under a settlement to allow INT to conduct investigations of their other World Bank-sponsored projects to determine whether these projects exhibit any evidence of improper conduct. Companies may also be required to inform the World Bank of prospective mergers or acquisitions, and agree to cooperate with INT in the investigation of these companies as well. Thus, such requirements could represent significant challenges to the company. Therefore, although a settlement may result in a shorter period of debarment than would occur if the sanctions case were fully litigated, the onerous requirements that the World Bank often insists upon as part of a negotiated settlement may outweigh the advantages of taking this path.
In making this assessment, practitioners should also keep in mind the aggravating and mitigating factors considered by the World Bank in imposing sanctions. As set forth in the report, aggravating factors include the severity of the misconduct (such as whether the company played a central role in the misconduct, or used sophisticated means to accomplish the misconduct), the harm caused by the misconduct (including both harm to the project and to public safety and welfare), whether the company interfered with the investigation (such as by destroying documents or intimidating witnesses), and whether the company has a past history of adjudicated misconduct. Mitigating factors include taking voluntary corrective action (including making restitution, taking action against responsible individuals, and implementation of a compliance program) and cooperating with the investigation (including voluntary disclosure and acceptance of responsibility). The report specifically highlights the timeliness of cooperation, the fast payment of restitution reflecting genuine remorse, and the prompt acceptance of responsibility as mitigating factors. This indicates that a company’s early remedial actions may be of considerable benefit in mitigating the sanctions that the World Bank will seek to impose, and should encourage practitioners to engage in such corrective conduct as soon as possible.
“World Bank Provides New Insights into Its Sanctions System,” by Dave Nadler and Adam Proujansky was published in Law360 on June 28, 2016. To read the article online, please click here.
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Encryption Disputes: Clues to Resolution May Lie in 1973 Disabilities Law
When the U.S. Department of Justice dropped its reverse-encryption suit earlier this year against Apple Inc. over the phone belonging to the alleged shooter in the San Bernardino attack, it marked the start, not the end, of a public-private negotiation on accessibility of information. Although the government was able to engineer an encryption workaround in this particular case, a number of governmental actions are pending nationwide, demanding decryption of Apple and Google Inc. devices under the All Writs Act.
Courts across the nation remain split on the applicability of the All Writs Act in such matters, ruling both for and against the government for similar requests.
To read the full article, please click here.
“Encryption Disputes: Clues to Resolution May Lie in 1973 Disabilities Law,” by Albert B. Krachman and Ameya V. Paradkar was published in the July 2016 edition of Westlaw Journal: Software Law (Volume 29, Issue 8), a Thomson Reuters publication. Reprinted with permission.
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