Government Contracts Blog : Government Contracts Lawyer & Attorney : Sheppard Mullin Law Firm : Bids, Licenses, Awards, Conflict of Interest.

On May 19, 2009, the Federal Circuit in Secretary of the Army v. Tecom upheld the contracting officer’s disallowance of a contractor’s legal costs and settlement expenses in a sexual harassment and retaliation action brought under Title VII. The opinion is sweeping, and appears to extend the holding in Boeing North American, Inc. v. Roche, 298 F.3d 1272 (Fed. Cir. 2002) to almost every instance in which the contractor elects to settle in lieu of litigating cases to a conclusion.
 

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In McDonnell Douglas Corp. v. United States, Civil Action No. 2007-5111-5113 (Fed. Cir. June 2, 2009), the Federal Circuit, after more than a decade of A-12 litigation, upheld a termination for default, finding that the Government was justifiably insecure about the contract's timely completion. The Court's opinion articulates the sustainable rationale for a default termination when there is no firm contract end date or set delivery schedule.
 

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The influential inside-the-Beltway newspaper and website Politico "reports" in its May 26th edition that, as the Administration is "following through" on its campaign pledge to cut wasteful Pentagon spending, it is finding that "the price is high." Politico, May 26, 2009 at 14. Well, OK, as a well worn bumper sticker says “Choices have consequences,” and the choice to cancel a contract is no exception to that rule. But the story's headline and subheadline presage Politico’s insidious and inaccurate message:
 

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For the third time, the Government has agreed to delay the mandatory implementation of E-Verify for government contractors. They will not have to comply with E-Verify until June 30, 2009, when contracting officers can begin inserting FAR clause 52.222-54. Employment Eligibility Verification, into solicitations and contracts. 74 Fed. Reg. 17793.

E-Verify has been pushed back once already as a result of a lawsuit in federal district court filed by the U.S. Chamber of Commerce and other parties. As this Blog has previously reported, the plaintiffs challenge the mandatory use of E-Verify for government contractors by means of an Executive Order despite statutory language making its use voluntary. Plaintiffs moved for summary judgment, and the court agreed to a Government request to stay proceedings while the new Administration assesses the new rule.
 

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The Congressional Research Service has recently published a useful and thought-provoking report on the potential Government-wide impact of the Federal Circuit’s November 4, 2008 decision in Rothe Development Corporation v. Department of Defense, 545 F.3d 1023 (Fed. Cir. 2008). Although we have previously reported on Rothe as it wound its way through the courts click here and here, the CRS Report provides a comprehensive litigative history of Rothe that is often lacking in piecemeal reports relating to the latest developments in that decade-long saga. It also assesses the potential impact of Rothe on a host of federal contracting programs designed to promote the participation of disadvantaged small businesses in the federal procurement process and, including SBA’s 8(a) Program, and on contracting assistance programs for women-owned businesses. While concluding, with suitable caveats, that few if any of these programs are likely to succumb to a Rothe-like attack, the report notes that cases like Rothe “place an increasingly heavy evidentiary burden on Congress,” that the courts’ traditional “deference to congressional authority has eroded over the years,” and that “Congress must now support any race-conscious measures by developing a strong record, as demonstrated in hearings and legislative findings, of methodologically sound, broad statistical evidence of discrimination capable of withstanding searching judicial inquiry.” The report is well worth the time it will take you to read it.

Authored by:

John W. Chierichella

(202) 218-6878

jchierichella@sheppardmullin.com

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Currently before Congress are at least two bills that could significantly increase government contractors’ liability and strengthen whistleblowers’ power to sue on behalf of the government. Senators Chuck Grassley (R-Iowa) and Patrick Leahy (D-Vermont) are spearheading a bipartisan effort to revise the False Claims Act (FCA), the government’s primary tool to recover damages for fraud related to government contracts. Under the FCA, the government may recover treble damages for false claims in addition to a $5,500 to $11,000 penalty per claim. The qui tam provisions of the FCA permit whistleblowers (called “relators”) to sue on behalf of the government and receive up to 30 percent of the government’s total recovery. Since 1986, the government has recovered over $22 billion through the FCA.

Both Senate bills would overturn court decisions that the sponsors (and the plaintiffs bar) allege were too friendly to contractors. The first bill, the Fraud Enforcement and Recovery Act of 2009 (FERA), would expand FCA liability, particularly for subcontractors. The second bill, the False Claims Act Clarification Act of 2009 (FCACA), would eliminate the public disclosure defense and give relators new procedural advantages. Interestingly, as we discussed here, the Department of Justice (DOJ) is already on record questioning the need for some of these provisions in earlier proposed legislation.
 

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In United States v. Hoffman, 556 F.3d 871 (2009), the appellate court upheld a gratuities conviction based on an indictment alleging that the defendant had given a Government employee a set of golf clubs for or because of that Government employee’s role in rating the contractor’s performance under a contract with the United States Army Corps of Engineers. The court’s opinion illustrates a number of key points regarding the gratuities statute and the types of conduct that create the risk of a gratuities violation.
 

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The Government Accountability Office (“GAO”) denies more than three quarters of all bid protests decided on the merits. Certain categories of protests, however, tend to be more successful than others. 

Three of our Government Contracts lawyers – Keith Szeliga, Marko Kipa, and Daniel Marcinak – recently published an article that assists protestors in identifying such allegations. Among other things, the article analyzes the most common categories of successful bid protest grounds and describes the circumstances under which each ground is likely to prevail. With permission of Briefing Papers, the article is reproduced in full in this issue of our blog. 

Click here to view a PDF copy of the article.

Authored by:

Keith R. Szeliga

(202) 218-0003

kszeliga@sheppardmullin.com

and

Marko W. Kipa

(202) 772-5302

mkipa@sheppardmullin.com

and

Daniel J. Marcinak

202) 772-5391

dmarcinak@sheppardmullin.com

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In his first month of office, President Obama issued three significant Executive Orders affecting employees of government contractors.  Revoking several Bush administration Executive Orders, the three new orders demonstrate a dramatic shift in federal labor policy.
 

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On November 4, 2008, the U.S. Court of Appeals for the Federal Circuit issued an opinion in Rothe Development Corporation v. Department of Defense, holding that a statute providing for race-based preferences in DOD procurements was unconstitutional.  We discussed this decision previously when it was released, noting that the ultimate consequences of the decision were uncertain.  We observed that the procedural time limits allowing appeal needed to pass before anything would be considered “final.”  Now that it seems that the Government is not appealing the Federal Circuit’s decision to the U.S. Supreme Court, District Judge Xavier Rodriguez (the original judge from the Western District of Texas) issued an Order on February 26, 2009 enjoining in whole the enabling statute at 10 U.S.C. § 2323, not merely those portions of the statute that relate to race-based preferences.
 

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Since the FAR Council’s November 2008 publication of new regulations mandating the disclosure by federal contractors of certain categories of wrongdoing and Government overpayments, there has been much ink spilled by lawyers, consultants, and the Government itself regarding what it all means.  The lack of clear definitions in the rule – notwithstanding the accompanying pages and pages of purported helpfully commentary – has provided ample opportunity for discussion, analysis, and conjecture regarding what the rule requires and what contractors should do to stay compliant.
 

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On January 15, 2009, the FAR Councils issued the final rule implementing the provision of the Trafficking Victims Protection Reauthorization Act of 2005 ("TVPA") 22 U.S.C. § 7104(g).  The final rule is implemented by FAR 52.222-50 entitled “Combatting Trafficking in Persons.”
 

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Mandatory implementation of E-Verify by government contractors – which was originally scheduled for January 15, 2009 and postponed until February 20 – has been postponed again in connection with a lawsuit filed by the Chamber of Commerce of the United States of America and its co-plaintiffs in U.S. District Court seeking declaratory and injunctive relief on several grounds. The government has now agreed that contractors need not comply with E-Verify until at least May 21, 2009.
 

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By now, everyone who has even a passing familiarity with the new “Contractor Code of Business Ethics and Conduct” clause that went into effect on December 12, 2008 knows that “internal controls” are important.  In fact, with the stakes under the new clause so high, many government contractor personnel can tell you that, under the clause FAR 52.203-13, they are required to:

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In its 2008 report on the Government’s financial consolidated statements released on December 15, the Government Accountability Office criticized “serious financial management problems at the Department of Defense, the federal government’s inability to adequately account for and reconcile intragovernmental activity and balances between federal agencies, and the federal government’s ineffective process for preparing the consolidated financial statements.”  GAO further reported that the Government did not comply “with significant laws and regulations.”  Ironically, this report issued just days after the Government forced all federal contractors to implement their own internal control systems under penalty of suspension or debarment.

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Beginning on January 15, 2009, certain federal contractors will be required to utilize the E-Verify system to assure that employees assigned to work on federal procurement contracts and all new employees are authorized to work in the United States.  E-Verify is an Internet-based employment verification system administered by the Department of Homeland Security (“DHS”) designed to ensure the legal employment status of employees working in the United States.

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On November 4, 2008, the U.S. Court of Appeals for the Federal Circuit issued an opinion in Rothe Development Corporation v. Department of Defense, No. 2008-1017, 2008 WL 4779586, holding that:

• Congress lacked a "strong basis in evidence" of discrimination by the Department of Defense ("DOD") against socially and economically disadvantaged individuals and businesses (referred to collectively as "socially disadvantaged businesses" or "SDBs");
• Lacking a "strong basis in evidence," the race-conscious remedial measures at 10 U.S.C. § 2323 (setting a goal to award at least 5% of annual contracting dollars to small disadvantaged businesses and authorizing certain set-asides for SDBs) were unconstitutional, violating the Fifth and Fourteenth Amendments to the U.S. Constitution guaranteeing equal protection to all citizens under the law; and
• The District Court hearing the case should enter an order declaring that the current 10 U.S.C. § 2323 is facially unconstitutional, and that its further application should be enjoined.

Since federal procurement includes a hodgepodge of "preferences" for small businesses, minority-owned businesses, women-owned business, veteran-owned businesses, service-disabled-veteran-owned businesses, historically underutilized business zone ("HUBZone") businesses, and other small disadvantaged business concerns, the Rothe decision has the potential for a significant ripple effect. Already the "splash" of the Rothe decision is obvious, with news of the recent decision being picked up by bloggers and newspapers alike. However, its ultimate impact remains to be seen and may be overstated by some recent analyses.

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• Disclose attorney-client communications to relatives or friends
• Speak with your attorney (or client) in the presence of third parties
• Use your company's computer to contact your personal attorney
• Tell corporate counsel about conversations with your personal attorney
• Disclose attorney-client communications to your personal accountant
• Disclose attorney-client communications to the company's outside auditors or investment bankers (some courts)
• Give business, not legal, advice
• Share the report of counsel's internal investigation with the government
• Assert advice of counsel defense in litigation
• Designate an attorney as deponent for the company
• Designate an attorney to verify discovery response
• Produce attorney-client privileged communications to an adversary
• Seek a new trial or other relief based upon ineffective assistance of counsel
• Sue your attorney for malpractice
• Sell the company to new owners who may waive the privilege
• Bankrupt or dissolve your company

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On April 30, 2008, the National Defense Industrial Association -- a trade association whose membership includes 1300 defense contractors, many of whom are small businesses -- filed an amicus curiae brief in support of a petition for a writ of certiorari at the U.S. Supreme Court. The amicus brief encouraged the Supreme Court to reverse a September 2007 decision by the U.S. Court of Appeals for the Federal Circuit vacating a $436 million verdict in favor of a victim thrift in a Winstar-related case because the thrift's agreement with the government was tainted from the inception by fraud and misrepresentation. Long Island Savings Bank, FSB v. United States, 503 F.3d 1234. The Federal Circuit held that any agreement with the federal government that is tainted by fraud or misrepresentation or conflict of interest at the outset -- even when the wrongful acts were committed by a rogue employee engaged in illegal acts of self-dealing -- automatically renders the agreement void in its entirety and absolves the government from any responsibility to perform (even though the contractor may have already fully performed under the agreement, and the government may have already received the benefit of the bargain).

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In March 2008, the U.S. Department of Justice ("DOJ") issued guidelines for the selection, scope of duties, and duration of corporate monitors in cases of deferred prosecution and non-prosecution agreements.  Although such agreements have become increasingly common, the process pursuant to which monitors are selected has recently drawn scrutiny in the wake of a no-bid, multi-million dollar monitoring contract awarded to the consulting firm of former Attorney General John Ashcroft, which was selected for the assignment by a former colleague of Mr. Ashcroft who worked under him when he headed the DOJ.  The ensuing controversy has prompted the DOJ to announce nine principles for the appointment and use of corporate monitors.  Foremost among these is sensitivity to conflicts of interest, nomination of the monitor by an ad hoc committee in the office negotiating the agreement, and approval by the Deputy Attorney General.  Other principles stress the monitor's primary responsibility to "address and reduce the risk of recurrence of the corporation's misconduct" through involvement with crafting the corporation's internal controls and compliance programs and familiarity with the "full scope of the corporation's misconduct."  All the while, the monitor should remain in "open dialogue" with the Government and the corporation and keep the former apprised of the latter's amenability to the monitor's recommendations.  Depending on the particular circumstances of a case, a monitor may be required to report undisclosed or new misconduct to the Government and should be prepared to remain in place if, "at the discretion of the Government," the corporation has not complied with the agreement to the Government's satisfaction.

Click here for the DOJ's memorandum on the selection and use of monitors in deferred prosecution agreements and non-prosecution agreements.

Authored by:

Daniel J. Marcinak

202.772.5391

dmarcinak@sheppardmullin.com

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A government contractor participating in an acquisition transaction must comply with both commercial and government-specific regulations. And there are numerous issues unique to government contractors that threaten a successful closing. If not identified or mitigated in a timely fashion, a contractor might unknowingly assume liabilities or fail to consummate the deal altogether. One issue involves the transfer of government contracts, which generally requires the government's consent, or a "novation." If the contractor does not novate the contract in accordance with designated rules, a buyer faces the possibility that its newly acquired contracts will be terminated for default. This could leave the contractor without the benefit of its bargain and with a "scarlet letter" on its record. While several exceptions to the general rule prohibiting the sale or transfer of government contracts have been carved-out in applicable regulations and case law, there are also structural alternatives available to the contractor that may not be so obvious. It is imperative that these options be considered and evaluated in order to attain the contractor's specific needs and expectations.

Click here to view a PDF copy of the article.

Authored by:

Marko W. Kipa

(202) 772-5302

mkipa@sheppardmullin.com

and

Lucantonio Salvi

(202) 218-0004

lsalvi@sheppardmullin.com

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Recently, the Government has been increasing its enforcement efforts under the Foreign Corrupt Practices Act, announcing that there are 60 active investigations in its pipeline and that five FBI agents have been assigned full time to FCPA enforcement.  In the last two years, more FCPA enforcement actions have been completed than in the prior ten years combined.  FCPA compliance is, moreover, not a “stand alone” issue – increasingly, FCPA have become a focal point in due diligence with respect to M&A activity and the formation of joint ventures, one party to which has historically conducted business in a high risk region.

Click here for a PowerPoint that summarizes some of the principal issues and questions that typically arise under the FCPA.

Authored by:

John Fornaciari

202.218.0009

jfornaciari@sheppardmullin.com

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John W. Chierichella and Marko W. Kipa
Legal Times
10-08-2007

Reform is not always popular among those who enjoyed the old regime. The current push to strip away protections afforded to contractors participating in commercial-item acquisitions illustrates this struggle - and why the reforms were valuable in the first place.

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For years, in-house counsel have struggled with how best to persuade their clients to establish codes of business conduct, implement training programs, and adopt systems for assessing contract compliance. While the wisdom of all three activities was obvious to lawyers, who have the benefit (or misfortune) of witnessing firsthand the pervasive impact of not doing these things, the message often was lost on revenue-driven sales organizations that could not quite grasp -- or preferred not to grasp -- the ROI of a robust internal compliance program.

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If discretion is the better part of valor, then administrative contracting officers must be feeling less valiant these days. When it comes to penalties for unallowable costs, ACOs and government auditors are beginning privately to admit what many contractors already know from experience – enforcement of FAR 42.709 is on the rise.  This article is designed to clarify some key underlying concepts, to identify major risks – as well as opportunities for their mitigation – and to discuss a few emerging issues.

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