Government Contracts Legal Forum : Government Contracts Lawyers & Attorneys for Litigation & Counseling

The Department of Defense (“DoD”) continues to contract out work that should be handled by federal employees, according to a new Government Accountability Office (“GAO”) study, which finds shortcomings in DoD’s tracking and management of such “inherently governmental” tasks.

The study urges DoD to better police its inventory of contracts—and bring in-house those functions too sensitive or policy-oriented for private contractors. DoD has agreed with the findings and has pledged to carry out GAO’s recommendations within the next year.

Inherently governmental functions are tasks intimately related to the public interest and that require discretion or value judgments in making decisions for the federal government. FAR § 7.503(c) contains a lengthy list of examples: criminal investigations, determinations of budget priorities, and setting agency policy, among many others. In addition, some functions not inherently governmental may still have to be brought in-house. FAR § 7.503(d) contains examples: budget preparations, evaluation of contractors, and inspection services, among others.

Congress, in section 803(c) of the National Defense Authorization Act for Fiscal Year 2010, directed GAO to report annually for three years on DoD’s inventory of contractor activity. In its first report, in January 2011, GAO found numerous holes in DoD’s inventory protocols and recommended the agency establish a plan for achieving goals and a time frame for reform. The new GAO study, however, finds only “limited progress” by DoD in meeting those goals.

The Army’s FY2009 inventory review found 1,935 instances where inherently governmental tasks were contracted out. The Air Force review found 91. The tasks included engineering and technical services, program management, and support services.  In the new study, GAO examined 12 of these improperly contracted-out tasks in-depth and found eight of them were still in the hands of private contractors despite GAO and Congress’s prior warnings.  In general, the GAO study concludes DoD needs  “greater accountability and management attention” in managing its contractor inventory.

With GAO slated to revisit the issue again in a year, DoD will likely increase its efforts to bring certain contracts in-house. Federal contractors would be wise to evaluate whether their work falls into the inherently governmental category and thus possibly work the federal government will soon seek to reclaim.

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Government contractors could soon be required to create anti-human trafficking compliance plans and face stiff penalties, including criminal charges, for using trafficked labor.

On March 27, 2012, anti-trafficking bills were simultaneously introduced in both chambers of Congress following recent reports of human trafficking carried out by local subcontractors in Iraq and Afghanistan.  A January report by the Pentagon inspector general found that 2011 saw more trafficking investigations of the defense contractor supply chain than in any of the four previous years. The new bills define human trafficking as occurring when, inter alia, labor is forced by confiscation of passports, employment terms are misrepresented during recruiting, and workers face oppressive fees for employment placement.

The new bills would apply to contractors receiving $1 million or more in federal contracts for work abroad. These companies would be required to annually certify that they are policing human trafficking in their work forces.  Any trafficking would have to be reported to the contracting agency’s inspector general. Remedial actions would include contract termination, suspension of contract payments, and withholding of award fees.  Moreover, the bills would enable the U.S. Justice Department to prosecute contractors engaging in trafficking abroad, with penalties of up to 5 years in prison.

The federal government in the past years appears to have taken trafficking concerns more seriously.  In December 2011, the U.S. Defense Department issued a final rule amending DFARS 242.302 to require human trafficking surveillance, which did not create a new obligation for contractors but simply put them on notice of anti-trafficking rules that had been on the books since February 2009. The bills now in Congress would, however, create significant new obligations for contractors over and above current regulations.

“We head from the Commission on Wartime Contracting and the inspectors general of the Defense Department and State Department that existing protections against human trafficking in connection with overseas government contracts are not sufficient,” said one of the bill’s sponsors, Sen. Rob Portman, R-Ohio, in a statement.

While the bills enjoy bipartisan support, their passage is, of course, uncertain. Nevertheless, contractors working abroad should consider proactive measures to detect or prevent use of human trafficked labor as it will likely be an issue of concern for the federal government for years to come.  

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U.S. Attorney General Eric Holder recently issued a DOJ-wide memorandum urging federal government attorneys to coordinate when conducting parallel civil, criminal, regulatory and administrative proceedings.  

Holder wrote that parallel criminal and civil investigations would deter future offenses and maintain program integrity, while also acting to “secure the full range of the government’s remedies (including incarceration, fines, penalties, damages, restitution to victims, asset seizure, civil and criminal forfeiture, and exclusion and debarment).” Absent such cooperation and coordination among prosecutors, “[the government] may not be able to realize all of the remedies available to the United States,” he warned.  The memorandum focused on three phases of the process:

• Intake. Justice Department attorneys are encouraged to immediately consider a broad array of civil, criminal, administrative or regulatory remedies that could be applied to any new matter that comes across their desks, whether originating from agency referrals, self-disclosures or qui tam actions.
  
• Investigation. Holder urges the various U.S. Attorney’s Offices and Department litigating components to share information.  Specifically, he said prosecutors should think twice before issuing grand jury subpoenas, which restricts the ability to share information with others, and to instead seek to obtain the information through administrative subpoenas, search warrants, consensual monitoring, interviews and other means. In matters where grand jury subpoenas are ultimately used, prosecutors are urged to seek order under Federal Rule of Criminal Procedure 6(e) to permit access by other federal agencies and departments to investigatory materials.
  
• Resolution. Prosecutors should consider the consequences of various case resolutions on potential parallel matters, the memo said.  For instance, the charges and facts in a plea agreement could have collateral estoppel and res judicata effects on civil and/or administrative cases.

The memo suggests that DOJ will increasingly — and aggressively — seek to investigate companies for both civil and criminal violations. This may necessitate a similarly coordinated response by defense counsel, who must bring together attorney teams that combine criminal and civil experience in order to effectively oppose such complex parallel prosecutions.

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The U.S. Department of Justice reported this week that it recovered $5.6 billion in criminal and civil fraud payments in fiscal year 2011, including more than $3 billion under the civil False Claims Act.  The fraud recoveries set a one-year record for DOJ; the FCA recoveries capped a record-setting three-year period during which DOJ recovered $8.7 billion. The figures underscore the Obama administration’s aggressive pursuit of fraud and false claims.

DOJ said its fraud recoveries were primarily driven by investigations into Medicare, mortgage, grant and contracting frauds. Officials said the recoveries were much-needed revenue generators for the federal government in a time of record debt and deficits.

“These recoveries far exceed the cost of the agents and prosecutors who secured them,” said Deputy Attorney General James M. Cole at a press conference alongside Vice President Joe Biden. “For every dollar Congress has provided for health care enforcement over the past there years, we have recovered nearly seven.”

Health care fraud –including Medicare, Medicaid, and Tricare—accounted for $2.4 billion of the FCA recoveries in fiscal year 2011. Procurement fraud cases accounted for $422 million in fiscal year 2011. 

Qui tam relators filed 638 suits FCA suits in 2011, far exceeding the average annual rate for the past decade. For contractors, these statistics make clear that—now more than ever—timely government contracts counseling is necessary to ensure compliance and avoid becoming a casualty in the government’s escalating war on fraud and false claims.

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The US Court of Federal Claims recently granted preliminary injunctive relief against a Federal contractor for an organizational conflict of interest, in a decision casting a deeply skeptical eye on an awardee’s improper access to competitor information--and the government’s lackadaisical attempt to police the impropriety.

The case, Netstar-1 Gov’t Consulting, Inc. v. United States, centered on a program management support services contract with the US Department of Homeland Security Immigration and Customs Enforcement (ICE) Office of Chief Information Officer. ICE awarded ALON, Inc. the contract. Both ALON and the protestor, NetStar-1, had performed previous related ICE contracts.

NetStar-1 alleged ALON used its previous access to ICE data – including NetStar-1’s labor categories, job categories, and labor rates – to improperly craft a winning proposal. The Federal Acquisition Regulations (FAR) definition of an organizational conflict of interest (OCI) includes situations where competitors have unequal access to procurement-related information, thereby giving one or more offerors an unfair bidding advantage. Judge Francis M. Allegra held that the facts established ALON had an OCI. ALON argued no unequal access existed because both firms had access to NetStar-1’s data—an argument the judge dismissed as “frivolous.” But it was the government’s conduct that drew much of his ire.

NetStar-1 alleged the ICE contracting officer (CO) involved failed to adequately mitigate the OCI. The FAR requires CO’s to “analyze planned acquisitions in order to (1) [i]dentify and evaluate potential organizational conflicts of interest as early in the acquisition process as possible; and (2) [a]void, neutralize, or mitigate significant potential conflicts before contract award.” In this case, the CO failed to make pre-award identification of ALON’s prior access to proprietary NetStar-1 data. “[E]ven more remarkable,” Judge Allegra noted, was that ALON’s other ICE contracts – negotiated by the same CO -- had clauses specifically warning that ALON would have future OCIs.

Judge Allegra continued: “The mitigation plan adopted by the contracting officer has some interesting features.” (One can almost hear the judge’s “ahem” come off the page.) The CO had obtained declarations from ALON employees saying they had not obtained NetStar-1 data. However, it turned out that the CO sought declarations from the wrong people—she never contacted the dozen ALON employees who actually had access to the data. Furthermore, the court found that the CO relied on incomplete non-disclosure statements from ALON and verbal pledges by the company. “Indeed, if the latter were enough, one must wonder why the drafters of the FAR bothered to develop an extensive set of rules to deal with such conflicts,” wrote Judge Allegra in his May 27, 2011 opinion.  

Based on these facts, the court concluded NetStar-1 had demonstrated the likelihood of success on the merits, the key requirement for obtaining preliminary injunctions. The court also found the three other injunction factors weighing in NetStar-1’s favor. The court enjoined the contract and set dates for a merits trial. The case demonstrates not only the imperative that Federal contractors to investigate competitors’ potential OCI’s, but also the need to demand that the government honor its FAR policing duties. Timely government contracts counseling can alert contractors to precisely such issues.  

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Verizon Communications, Inc. recently paid the U.S. government $93.5 million to resolve False Claims Act allegations that it overcharged the government on voice and data telecommunications services contracts.  In addition to the significance of the amount paid, the case is notable for both the government’s aggressive enforcement of FAR provisions and the fact the alleged fraud occurred in the midst of a massive and complex telecom merger. Both underscore the need for timely and astute Government Contracts counseling.

Verizon subsidiary MCI Communications Services Inc. dba Verizon Business Services (“MCI”) is alleged to have invoiced the General Service Administration (“GSA”) for a variety of federal, state and local taxes and surcharges in violation of the contracts or applicable regulations in connection with the FTS2001 and FTS2001 Bridge contracts to provide voice and data telecommunications to an array of federal agencies.  The Department of Justice’s (“DoJ’s) joint investigation with GSA’s Office of the Inspector General found that Verizon and MCI submitted false claims under the contracts for the reimbursement of property taxes, common carrier recovery charges and unallowable surcharges -- charges that the government alleges are not directly reimbursable under the FTS2001 contracts.

According to the complaint in United States ex rel. Stephen M. Shea and 2Probe LLC v. Verizon Communications, Inc., MCI began submitting fraudulent invoices to GSA in 1999 that included surcharges for federal, state and local taxes, as well as certain duties, bundled into line items that “conceal the true nature of the charges.”  FAR 52.229-04, among other provisions governing the FTS2001 contract, states, “[u]nless otherwise provided in this contract, the contract price includes all applicable Federal, States and local taxes and duties.”  Since the FTS2001 contract did not provide for tax-related surcharges, MCI’s surcharges violated the reg, according to the complaint.

The government alleged the fraud lasted from 1999 to 2010.  In 2006, Verizon acquired MCI for $6.75 billion during a period of frenzied consolidation in the telecom industry. Verizon inherited the FTS2001 contract --and the government alleges the fraudulent billing continued unabated.

The government learned of the alleged fraud from relator Stephen Shea, a telecom consultant who assisted corporations in managing telecom costs. According to the complaint, Shea first noticed the errant surcharges in the communications bills of his corporate clients. (The other relator, 2Probe LLC, is owned by Shea and a Delaware-based corporate litigator.) GSA’s Inspector General and DoJ then jointly investigated the matter.  DoJ announced the settlement on April 5. Verizon agreed to $92.7 million plus interest; the whistleblowers’ share has yet to be decided.

“This $93 million recovery should make contractors realize that we are firmly committed to ensuring the integrity of corporate billing practices with respect to government programs,” said U.S. Attorney for the District of Columbia Ronald C. Machen, Jr., in a statement.

The case offers lessons. First, it pays to closely scrutinize the myriad regulations incorporated into government contracts. And such scrutiny is all the more crucial during fast-moving corporate deals, when contractual details can get lost in the shuffle. 

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