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United States: Government Contracts Alert – Spring 2009

25 June 2009
Article by James McCullough, Joel R. Feildelman, William H. Taft, Steven A. Alerding, Michael J. Anstett, Joseph J. LoBue and William S. Speros

RECENT DEVELOPMENTS

False Claims Act Amendments: On May 20, 2009, the Fraud Enforcement and Recovery Act of 2009 was signed into law, marking only the second time in the history of the civil False Claims Act (FCA) that all-embracing amendments have been made to this 1863 law. The new amendments will adversely affect contractors (and any other person, company, or entity that pays money to the Government or receives Federal funds) by making it far easier to conduct FCA investigations and win FCA recoveries. For a detailed discussion of these significant changes to the FCA, please see Fried Frank FraudMail Alert No. 09-05-21.

 

 

American Recovery And Reinvestment Act Of 2009: Interim rules have been issued implementing procurement-related provisions of the American Recovery and Reinvestment Act of 2009 (Recovery Act), which was signed into law on February 17, 2009. 74 Fed. Reg. 14622-52 (Mar. 31, 2009). One of the interim rules prohibits the use of funds provided by the Recovery Act for any project for the construction, alteration, maintenance, or repair of a public building or public work unless all of the iron, steel, and other manufactured goods used as construction material in the project are produced or manufactured in the United States, subject to certain exceptions. Another interim rule requires contractors that receive awards funded in whole or in part by the Recovery Act to report quarterly on the use of such funds. These reporting requirements apply to nearly all Recovery Act-funded contracts, including commercial item contracts, commercially available off-the-shelf (COTS) item contracts, and contracting actions below the simplified acquisition threshold. Other interim rules provide for whistleblower protections and access by Government auditors to contractor records and personnel under contracts involving Recovery Act funds. The interim rules went into effect on March 31, 2009. See also 74 Fed. Reg. 18449 (Apr. 23, 2009) (establishing Government-wide guidance and standard award terms for agencies to include in grants, cooperative agreements, and loans funded under the Recovery Act). In addition, on April 3, 2009 the Office of Management and Budget (OMB) issued updated Government-wide guidance for implementing the Recovery Act, including guidance regarding the award and administration of contracts and grants. This guidance can be found at http://www.recovery.gov/?q=node/317. Other OMB guidance relating to the Recovery Act, including guidance regarding requirements with respect to grants and cooperative agreements, also may be found at http://www.whitehouse.gov/omb/memoranda_default/. (For a discussion of how these interim rules may provide the basis for significant future False Claims Act liability, see the Practitioner’s Comment at the end of the article.)

 

 

Organizational Conflicts Of Interest: On May 22, 2009, the Weapon Systems Acquisition Reform Act of 2009 was signed into law. Among other provisions, the Act requires the Secretary of Defense to revise the Defense Federal Acquisition Regulation Supplement (DFARS) to provide uniform guidance and “tighten existing requirements” for organizational conflicts of interest (OCIs) by contractors in major defense acquisition programs. At a minimum, these revised regulations are required to address OCIs that could arise as a result of: (1) lead system integrator contracts on major defense acquisition programs and contracts that follow lead system integrator contracts on such programs, particularly contracts for production; (2) the ownership of business units performing systems engineering and technical assistance functions, professional services, or management support services in relation to major defense acquisition programs by contractors who simultaneously own business units competing to perform as either the prime contractor or the supplier of a major subsystem or component for such programs; (3) the award of major subsystem contracts by a prime contractor for a major defense acquisition program to business units or other affiliates of the same parent corporate entity, and particularly the award of subcontracts for software integration or the development of a proprietary software system architecture; or (4) the performance by, or assistance of, contractors in technical evaluations on major defense acquisition programs. The revised regulations also must require that a contract for the performance of systems engineering and technical assistance functions for a major defense acquisition program contains a provision prohibiting the contractor or any affiliate from participating as a prime contractor or a major subcontractor in the development or construction of a weapon system under the program. The Secretary of Defense is required to make these DFARS revisions within 270 days of May 22, 2009.

 

 

Employment Eligibility Verification: The applicability date of a new rule, which requires certain contractors and subcontractors to use the US Citizenship and Immigration Services’ E-Verify System as the means of verifying that certain employees are eligible to work in the United States, has been delayed to September 8, 2009. 74 Fed. Reg. 26981 (Jun. 5, 2009); 74 Fed. Reg. 17793 (Apr. 17, 2009); 74 Fed. Reg. 5621 (Jan. 30, 2009); 73 Fed. Reg. 67651 (Nov. 14, 2008). The rule contains a new Federal Acquisition Regulation (FAR) clause (52.222-54) that requires contractors and subcontractors to enroll in the E-Verify program within 30 days of contract award and to begin to use E-Verify within 90 days of enrollment. The requirements apply to all prime contracts except those that (1) are under the simplified acquisition threshold (generally $100,000), (2) are only for work that will be performed outside the United States, (3) have a performance period of less than 120 days, or (4) are only for COTS items, certain other “would be” COTS items, or certain COTS-associated commercial services. Prime contractors are required to flow these requirements down to subcontracts that exceed $3,000, include work performed in the United States, and are for commercial or noncommercial services (except for certain COTS-related commercial services) or construction. The rule should be consulted for further details concerning the application of these requirements to particular categories of employees.

 

 

Post-Government Employment Restrictions: The Department of Defense (DOD) issued an interim rule amending the DFARS to address recently enacted statutory requirements for certain DOD officials to obtain a post-Government employment ethics opinion before accepting a position from a DOD contractor within two years after leaving DOD service. 74 Fed. Reg. 2408 (Jan. 15, 2009). The interim rule, which implements Section 847 of the National Defense Authorization Act for Fiscal Year 2008, applies to certain DOD officials who have held a key acquisition position or who have participated personally and substantially in a DOD acquisition exceeding $10 million. In addition, DOD contractors are prohibited from knowingly providing compensation to any such former official within two years after the official leaves DOD service without first determining that the former official has sought and received (or has not received 30 days after seeking) a written opinion from the appropriate DOD ethics official regarding the applicability of post-Government employment restrictions to the activities that the former official is expected to undertake on behalf of the contractor. Failure by a contractor to comply with this prohibition may subject it to contract rescission, suspension, or debarment. The interim rule went into effect on January 15, 2009.

 

 

Freedom Of Information Act: The US Attorney General issued a memorandum on March 19, 2009 revising Department of Justice (DOJ) policy regarding Freedom of Information Act (FOIA) requests. The memorandum states that agencies “should not withhold information simply because it may do so legally.” The Attorney General instead strongly encourages agencies to make “discretionary” disclosures of information: “An agency should not withhold records merely because it can demonstrate, as a technical matter, that the records fall within the scope of a FOIA exemption.” The memorandum rescinds an October 2001 Attorney General memorandum which stated that the DOJ would defend decisions to withhold records requested under FOIA unless the decisions “lack a sound legal basis or present an unwarranted risk of adverse impact on the ability of other agencies to protect other important records.” The DOJ will now defend the denial of a FOIA request only if (1) the agency reasonably foresees that disclosure would harm an interest protected by one of the statutory exemptions or (2) disclosure is prohibited by law. The Attorney General’s Memorandum may be found at http://www.usdoj.gov/ag/foia-memo-march2009.pdf. The Government’s looser standard for releasing information under FOIA may force more contractors to turn to the courts to protect confidential information from being released to their competitors and other third parties. In that regard, a US district court recently held that a multiple award contractor’s e-mails to the Government regarding the eligibility of another contractor to receive work were exempt from disclosure under FOIA because they contained confidential commercial information. Tybrin Corp. v. US Dept. of Air Force, No. 3:08-cv-002 (S.D. Ohio Feb. 19, 2009). (For a detailed discussion of emerging FOIA policies, see “FEATURE COMMENT: The Obama Administration’s Emerging Policies on Freedom of Information, Transparency and Open Government – New Benefits and Costs for Government Contractors?”)

 

 

RECENT DECISIONS

Solicitation Defects: The US Government Accountability Office (GAO) sustained a pre-award bid protest because the solicitation, which contemplated the award of two Defense Logistics Agency (DLA) contracts for food distribution services in Kuwait, Iraq, and Jordan, did not adequately describe the basis for award. PWC Logistics Services Co., B-400660, Jan. 6, 2009. The solicitation divided the requirement into two zones – one with an estimated value of $7.85 billion and the other with an estimated value of $1.58 billion – and stated that the DLA intended to award each zone to a different contractor. Although the solicitation identified the evaluation factors that the DLA would consider in determining the most advantageous proposal for award of each zone, the solicitation was silent as to the basis for determining which zone an offeror would be awarded if its proposal was found to be the most advantageous for both zones. The GAO concluded that this was inconsistent with the Competition in Contracting Act requirement that agencies identify the bases upon which offerors’ proposals will be evaluated. The GAO further noted that this omission was particularly significant here where the estimated value of one zone was nearly five times greater than the value of the other zone.

 

 

Unduly Restrictive Requirements: The GAO sustained a bid protest challenging the terms of a US Army solicitation for telecommunications equipment because the Army failed to establish that a requirement for equipment certification at the time of proposal submission was necessary to meet the agency’s needs. SMARTnet, Inc., B-400651.2, Jan. 27, 2009, 2009 CPD ¶ 34. The Army required the equipment to be certified by the Joint Interoperability Test Command (JITC), a part of the Defense Information Systems Agency that provides testing and certification of information technology systems and equipment. The protester argued that requiring this certification at the time of proposal submission was unduly restrictive of competition because the JITC certification process is time-consuming and is only performed at two sites in the United States. As a result, the requirement would essentially restrict the procurement to firms that already had the certification at the time the solicitation was issued. The GAO concluded that the Army’s legitimate need for equipment to be JITC-certified at the time of equipment installation did not justify a requirement for certification at the time of proposal submission. “An agency’s otherwise legitimate requirements regarding an offeror’s demonstrated ability to meet contract requirements may not be required prior to when such qualifications become relevant.”

 

 

Procurement Integrity: The GAO refused to review a bid protester’s allegation that the awardee of a NASA contract for space communications network services gained an unfair competitive advantage through its retention of a former NASA official as a consultant for the procurement because the protester failed to timely report this alleged procurement integrity violation to NASA. Honeywell Technology Solutions, Inc., B-400771 et al., Jan. 27, 2009, 2009 CPD ¶ 49. In accordance with statutory procurement integrity provisions and the GAO’s bid protest regulations, the GAO cannot consider a protester’s allegation of a procurement integrity violation unless the protester reported the alleged violation to the contracting agency within 14 days after first becoming aware of the information or facts giving rise to the alleged violation. Here, approximately 10 months before award (and a month before the solicitation was issued) a vice president of the protester learned at a NASA holiday party that a former NASA official, who had been involved in overseeing the developmental and operational elements of the procurement’s statement of work, was assisting another offeror (the eventual awardee) with its proposal. The protester, however, failed to report this potential procurement integrity violation to NASA within 14 days after the holiday party and, instead, first raised the alleged violation nearly a year later in a post-award GAO protest. The GAO therefore dismissed the allegation as untimely.

 

 

Trade Agreements Act: The GAO sustained a bid protest challenging the award of a General Services Administration (GSA) contract for mini-utility vehicles because the GSA failed to follow required evaluation procedures for procurements covered by the Trade Agreements Act (TAA). Tiger Truck, LLC, B-400685, Jan. 14, 2009, 2009 CPD ¶ 19. When the TAA applies to a procurement, the Government must acquire only US-made or designated country end products, unless offers of such “TAA-compliant” products either are not received or are insufficient to fulfil requirements. The GSA received quotations from three offerors, but only one offeror – the protester – certified that its vehicles were TAA-compliant. The GSA, however, concluded that it could not award the contract to the protester because its quoted prices were “exorbitantly unreasonable.” The GSA therefore awarded the contract to another offeror, even though it did not offer TAA-compliant vehicles. The GAO concluded that this evaluation process was flawed. To begin with, while the protester certified that its vehicles were manufactured in the United States, the GSA determined only that the vehicles – which contained several parts purchased from outside the United States – “may” be TAA-compliant. The GAO stated that the GSA should first have determined whether the protester’s vehicles were TAA-compliant in order to ascertain whether any TAA-compliant products were available. If the GSA had determined that the protester’s vehicles were TAA-compliant, the GAO stated that the other two offerors’ quotations for non-TAA-compliant vehicles should have been eliminated from consideration and the GSA should have evaluated only the protester’s quotation. If, however, the GSA had determined that the protester’s vehicles were not TAA-compliant, the head of the contracting activity would have been required to issue a non-availability determination before the GSA could have selected a quotation for non-TAA-compliant vehicles for award. Instead, the GSA improperly failed to determine whether the protester’s vehicles complied with the TAA and, in addition, made award based on a quotation for non-TAA-compliant vehicles without first obtaining a non-availability determination from the head of the contracting activity. In addition, in response to the GSA’s assertion that the protester was not prejudiced by these errors because it was ineligible for award due to its unreasonable prices, the GAO concluded that the GSA failed to conduct meaningful discussions with the protester regarding its quoted prices. Although the GSA clearly viewed the protester’s prices as a deficiency, and the sole basis for rejecting the quotation, the agency during discussions never raised its concern that the quoted prices were unreasonable. The GAO stated that, had the GSA conducted meaningful discussions, the protester would have had the opportunity to reduce its prices or explain why they were fair and reasonable, which could have resolved the GSA’s pricing concerns and resulted in an award to the protester.

 

 

Competitive Range Determinations: The GAO sustained a bid protest regarding a Department of Health and Human Services (HHS) procurement for custodial services because the HHS excluded the protester’s proposal from the competitive range without considering its proposed price. Arc- Tech, Inc., B-400325.3, Feb. 19, 2009, 2009 CPD ¶ 53. An agency may properly exclude a technically unacceptable proposal from the competitive range regardless of its price; however, an agency may not, as here, exclude a technically acceptable proposal from the competitive range without taking into account the relative cost of that proposal to the Government. (In another recent decision involving an agency’s failure to properly consider price, the GAO sustained a protest regarding the issuance of a US Marine Corps task order for information technology services because the record did not establish that the Marine Corps meaningfully considered the protester’s lower price in the agency’s cost/technical tradeoff analysis. ACCESS Systems, Inc., B- 400623.3, Mar. 4, 2009, 2009 CPD ¶ 56. Although the Marine Corps qualitatively evaluated the offerors’ technical quotations and identified differing strengths, the agency was unable, even after a hearing, to explain what evaluated strengths justified paying the price premium associated with the awardee’s quotation. Instead, the Marine Corps repeatedly argued that the protester’s lower evaluated price did not reflect a price advantage.)

 

 

Methods Of Delivery Order Placement: The Armed Services Board of Contract Appeals (ASBCA) held that a contractor was entitled to an equitable adjustment because the US Navy used a contractually unauthorized method for placing delivery orders under an indefinite delivery, indefinite quantity contract to supply digital modular radios. General Dynamics C4 Systems, Inc., ASBCA No. 54988, May 8, 2009. The Navy issued the delivery orders in question by e-mail. The contract, however, did not authorize such a method of delivery order placement. While the contract’s Ordering clause provided that orders could be issued by electronic commerce methods “only if authorized in the Schedule,” the contract’s Schedule did not authorize issuance of orders by e-mail. Likening the placement of orders to the exercise of options, the ASBCA determined that, for an order to be effective, the Government must exercise it in strict compliance with the contract’s terms and, when the Government does not do so but requires the contractor to perform, the contractor has the right to recover the costs it incurred in performing the work, plus a reasonable profit. In that regard, it should be noted that the contractor alleged that the e-mailed delivery orders contained “unconscionable prices” in light of then-extent circumstances, and it sought the difference between the prices paid and its actual performance costs, plus profit.

 

 

Limitation Of Funds: The US Civilian Board of Contract Appeals (CBCA) held that, notwithstanding an Incremental Funding/Limitation of Liability clause in a GSA contract for information technology systems support services, the agency was required to reimburse the contractor for invoiced services exceeding the total authorized funding under the contract. DSS Services, Inc. v. General Services Administration, CBCA No. 1093, Apr. 16, 2009. Although the contract was primarily for services, the GSA modified the contract to require the contractor also to provide equipment. Significantly, however, this modification did not add a contract line item (CLIN) against which to charge the equipment costs; the GSA instead simply increased funding at various times in response to requests for equipment. The contractor ultimately submitted invoices totaling $2.65 million for services rendered under the contract’s four CLINs, which was less than $2.96 million in total funding authorized under the contract, as amended. When equipment costs were added, however, the total costs invoiced under the contract exceeded the total authorized funding. As a result, the GSA refused to pay $691,048 of the invoiced services, the amount in excess of the funding ceiling. The GSA asserted that, pursuant to the contract’s Incremental Funding/Limitation of Liability clause, the contractor should have stopped work once the total amount payable by the GSA under contract, including for both services and equipment, reached the total authorized funding. However, the CBCA determined that, had the GSA not used contract funds to pay for equipment that had not been allocated to a specific CLIN, the total funding under the contract would have been sufficient to cover all of the invoices for services rendered under the CLINs. “The fact that the Government failed to properly charge equipment against a CLIN cannot be the basis for refusing to pay [the contractor] for services properly rendered under the contract.” The CBCA therefore held that the contractor was entitled to payment of the $691,048 in invoiced services which the GSA refused to pay, plus interest.

 

 

Allowability Of Defense And Settlement Costs: The US Court of Appeals for the Federal Circuit (Federal Circuit) reversed a decision of the ASBCA because the ASBCA erroneously held that a military housing contractor’s costs associated with defending and settling a sexual harassment lawsuit were allowable under the contract regardless of the lawsuit’s merits. Geren v. Tecom, Inc., No. 2008-1171 (Fed. Cir. May 19, 2009). During the performance of a cost reimbursement contract for military housing maintenance, a former employee sued the contractor under Title VII of the Civil Rights Act of 1964, alleging sexual harassment and firing in retaliation for filing a sexual harassment charge while the employee was working under the contract. The contractor subsequently settled the case without admitting any wrongdoing, and then sought to (1) include its related legal fees as an indirect cost charged to its G&A expense pool and (2) bill the settlement costs as a direct cost of the contract. The Federal Circuit first held that the costs associated with an adverse judgment in the sexual harassment case would not have been allowable because the alleged harassment clearly would have violated the contract, which included a FAR clause prohibiting discrimination on the basis of sex. The Federal Circuit therefore further held that, under its decision in Boeing North American, Inc. v. Roche, 298 F.3d 1274 (Fed. Cir. 2002), the contractor’s defense and settlement costs were allowable only if the contractor could show that the plaintiff in the Title VII suit had “very little likelihood of success on the merits.” Because the ASBCA refused to apply this standard to the contractor’s defense and settlement costs, the Federal Circuit reversed the ASBCA’s decision and remanded the case to the Board for further proceedings.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

Specific Questions relating to this article should be addressed directly to the author.

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