The 2016 National Defense Authorization Act prohibits the Defense Contract Audit Agency from providing “audit support” to any non-DOD agency until the Secretary of Defense certifies that DCAA has reduced its backlog of incurred cost audits to 18 months or less, a restriction that could cause some disruption for contractors when DOD contracts are not a majority of the contractor’s government work and when audit support has been provided by DCAA in the past. On January 7, 2016, DCAA issued guidance to its auditors that appears to limit the prohibition on “audit support” to incurred cost audits, leaving DCAA auditors free to provide other accounting services to non-DOD agencies, specifically permitting DCAA to perform incurred cost audits that include both DOD and non-DOD contracts when auditors determine that inclusion of the non-DOD contracts involves “de minimis” incremental effort by DCAA, and offering guidance about how to handle such “mixed” audits when the non-DOD contracts will create more than “de minimis” incremental effort.
On January 22, 2016, the FAR Council proposed adding a new rule (link here) prohibiting federal dollars from going to companies that require employees to sign confidentiality agreements that could limit the ability of employees to report suspected fraud and abuse to the government.
The proposed rule comes at a time of increased attention on the use of confidentiality agreements by government contractors. As described here, a 2015 Report by the Office of the Inspector General for the State Department found that almost half of the thirty-highest grossing contractors had policies containing provisions that could have a “chilling effect on employees who wish to report fraud, waste, or abuse to a Federal official.” In April, the SEC fined contractor KBR for requiring employees to sign confidentiality agreements that the SEC believed prevented potential whistleblowers from reporting concerns to government agencies.
The proposed FAR rule implements Section 743 of the 2015 Consolidated and Further Continuing Appropriations Act. The rule requires that each offeror, in order to be eligible for award, must represent by submission of its offer that it does not require employees or subcontractors to sign internal confidentiality agreements that could restrict employees from lawfully reporting waste, fraud, or abuse. The proposed rule would apply to all contracts, except those related to personal services contracts with individual workers, regardless of amount, even including ones below the simplified acquisition threshold. Contracts for the purchase of commercial items, both special-order and off-the-shelf, would also be subject to the rule. The proposed rule requires modification of existing contracts to include the new FAR clause before obtaining Fiscal Year (“FY”) 2015 or subsequent FY funds that are subject to the same prohibition on confidentiality agreements.
In light of the proposed rule — and the 2015 Department of Defense class deviation implementing the substance of the rule on DoD contracts — contractors will want to review their internal policies and confidentiality agreements. Companies have a legitimate interest in protecting privileged and confidential information in connection with internal investigations, but companies may need to revise the language in their agreements if the agreement could be construed as restricting employees from providing the government with information regarding potential violations of law.
Crowell & Moring LLP is pleased to release its “2016 Litigation & Regulatory Forecasts: What Corporate Counsel Need to Know for the Coming Year.” The reports examine the trends and developments that will impact government contractors and other corporations in the coming year—from the last year of the Obama administration to how corporate litigation strategy is transforming from the inside out. This year will bring remarkable change for companies, as market disruptions and the speed of innovation transform industries like never before, and the litigation and regulatory environments in which they operate are keeping pace.
On September 29, 2015, the Fourth Circuit agreed to hear an interlocutory appeal in U.S. ex rel. Michaels et al. v. Agape Senior Community, Inc. to address whether the statistical method of extrapolation may be used to prove liability, in addition to damages, under the False Claims Act. The Fourth Circuit will be the first appellate court to rule on this controversial issue.
Extrapolation, or statistical sampling, is a method in which a sample of data is used to draw inferences about a larger population. Litigators implement extrapolation in areas of complex litigation, including antitrust, employment discrimination, mass torts, and voting rights cases. In the FCA context, however, litigators have utilized extrapolation solely to prove damages. The use of extrapolation expanded in 2014, when the U.S. District Court for the Eastern District of Tennessee, in U.S. ex rel. Martin v. Life Care Centers, allowed plaintiffs to use statistical sampling not only to calculate damages, but also to establish the underlying FCA liability. Subsequent rulings by federal district courts reach divergent positions.
In “Extrapolation in FCA Litigation: A Statistical Anomaly or a Tactic Here to Stay?”, a Feature Comment published by The Government Contractor, C&M Attorneys outline the origins of extrapolation, examine the divergent federal district court rulings on whether it may be used to prove damages, explain the significance of extrapolation to contractors facing False Claims Act liability, and offer practice tips for litigating cases with statistical sampling.
In Guardian Angels Med. Serv. Dogs Inc. v. U.S. (Jan. 8, 2016), the Federal Circuit held that a CO’s request to evaluate additional information after a default termination “vitiated the finality” of the termination and reset the 12-month appeal clock, even though the CO neither received new information nor spent any time reconsidering her decision. Reversing the CFC’s dismissal of the appeal as time-barred, the court held that, when a CO “evince[s] a clear willingness to consider additional evidence,” the appeal period begins anew, rather than merely being suspended, and explained that “whether the contracting officer ‘spends time’ considering the request is not the proper standard.”
Will it be more of the same for government contractors in 2016? Can contractors expect increased oversight, intense competition, new regulations, and consolidation? On Thursday, January 14, Crowell & Moring will be hosting a webinar to discuss the likely trends in the coming year. Topics to be covered include: cost, commercial items, update on Executive Orders, investigations, compliance, suspension/debarment, GSA and VA schedules, mergers & acquisitions, small business, procurement fraud and much more. Our presenters are some of the most experienced in their field. To register for this free webinar, please click here.
The FY 2016 Omnibus Appropriations bill, passed on December 18, 2015, did not appropriate funds to establish an Office of Labor Compliance within the Department of Labor in order to implement the “Fair Play and Safe Workplaces” Executive Order, as requested by the Obama Administration. By declining to appropriate the requested funds, Congress pumped the brakes on the implementation of the EO, which, as described here, would impose burdensome compliance and reporting obligations on federal contractors and subcontractors.
Last week, in a case that will have a significant impact on the government contracting industry, the Supreme Court granted certiorari in Universal Health Services, Inc. v. United States ex rel. Escobar, a False Claims Act (FCA) case from the First Circuit. By agreeing to hear the case, the Court appears set to resolve a circuit split over the implied certification theory of legal falsity under the FCA. Specifically, the court will consider whether (1) the implied certification theory of legal falsity under the FCA is viable; and (2) if the theory is viable, a government contractor’s reimbursement claim can be legally false when the provider failed to comply with a statute, regulation, or contractual provision that does not state that it is a condition of payment but is deemed “material” to the government’s decision to pay the claim.
At present, eight of the thirteen circuits have accepted the implied certification theory in some form, with only the Seventh Circuit rejecting the theory outright, but the eight circuits have reached varying conclusions about the appropriate scope of the theory. The Sixth and Second Circuits have held that liability for a legally false reimbursement claim requires that the contract, statute, or regulation expressly state that it is a prerequisite of payment. On the other hand, the Fourth, First, and D.C. Circuits have generally held that a government contractor’s reimbursement claim can still be legally false, and thus subject it to FCA liability, even if the provider failed to comply with a contract, statute, or regulatory provision that does not state that compliance is a prerequisite of payment. Under this theory, a contractor can face liability even if it failed to comply with one of the technical requirements imposed by the contract, so long as that requirement was somehow material to payment. The Court’s decision will have implications for any business that submits claims for payment to the federal government, and will likely eliminate the possibility of different outcomes for attaching FCA liability—under factually identical circumstances—based on where the case is filed.
On November 27, 2015, the Office of Government Ethics (“OGE”) issued a proposed rule that would revise the portions of the Standards of Ethical Conduct for Executive Branch Employees that govern the solicitation and acceptance of gifts from outside sources (“Standards”). See 5 CFR § 2635. Although it is a proposed rule (with the comment period closing on January 26, 2016), the OGE has identified several areas in which the new language is meant to “clarify” the existing rules and “incorporate past interpretive guidance.”
On Nov. 19, 2015, OMB released the fall 2015 regulatory agenda of regulations currently under development, listing April 2016 as the target for publication of the final rule implementing the “Fair Pay and Safe Work Places” executive order. The final rule, which is likely to be challenged in court by contractors and industry trade groups, will impose significant compliance and reporting obligations on federal contractors (discussed here), causing some contractors to begin reviewing internal processes for identifying and reporting labor compliance information under the rule.