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Welcome to our Government Contracts Classroom. Through a variety of media, the Classroom will serve as a resource for government contractors. The Classroom is intended to provide insight and training on issues that government contractors, and their legal and business teams, often face. The Classroom will be updated regularly with new content, host on-demand materials, and have a schedule of upcoming presentations hosted by the Crowell & Moring Government Contracts Group.

We’d love to hear from you – please click here to suggest topics for future trainings.

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Last week, the House of Representatives passed a bill that would ban some U.S. Federal agencies from purchasing drones and drone components manufactured in certain foreign countries.  The “Drone Origin Security Enhancement Act,” would prevent all government agencies from purchasing drones based solely on their country of manufacture.  A similar bill currently in the Senate, though not as far along as the House bill, would only prohibit such procurement by Department of Homeland Security (“DHS”) agencies.  The proposed bills prohibit the procurement of drones manufactured in any nation designated by the Department of Commerce, the Director of National Intelligence or the Secretary of Homeland Security as a national security threat.  The main target is China, home of major manufacturers of drones and drone components alike.

The consequences of the bills could be far-reaching, as the ban may expand beyond the drone itself to include component parts in products and devices that support the drone system.  The bills define a foreign manufactured drone broadly, including the flight controllers, radios, data transmission devices, cameras, gimbals, ground control systems, and operating software that make up or are mounted on the drone.  These components are critical to drones used in commercial operations.  Due to China’s dominance in manufacturing, these restrictions could be problematic for U.S. Government users and for drone manufacturers that install Chinese-made components on their drones.

Click here to continue reading the full version of this alert.

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On January 31, 2020, the Trump administration issued an executive order cracking down on U.S. businesses that import directly or facilitate the import of counterfeit or pirated goods, illegal narcotics and other contraband. The order, entitled “Ensuring Safe & Lawful E-Commerce for US Consumers, Business, Government Supply Chains and Intellectual Property Rights,” directs various government departments and agencies to undertake a series of measures to carry out the president’s effort to combat illegal imports. The initiative has far-reaching implications not only for importers and brand owners but also for e-commerce platforms, government contractors, and service providers in the global supply chain that provide warehouse, customs brokerage and transportation services. Parties that fail to comply with the new measures may be barred from participation in certain transactions involving the federal government and/or banned from importing goods into the United States. Additionally, the Department of Justice will be notified of custom violations that are actionable under the False Claims Act, thus another implication is the potential for increased civil and criminal enforcement actions.

Background & Content

This executive order is a culmination of the president’s “call to action” to combat infringing goods set forth in his April 2019 “Memorandum on Combating Trafficking Counterfeit and Pirated Goods.” The Memorandum outlined the impact that illicit goods are having on U.S. businesses and consumers and set in motion the administration’s effort to study and establish a plan to address the issue. The Department of Commerce subsequently issued a Federal Register notice on July 10, 2919 (84 FR 3281), soliciting public comment from IP rights holders, online third-party marketplaces, and other interested parties. The Department of Homeland Security followed up with its recent report, “Combating Trafficking in Counterfeit and Pirated Goods” on January 24, 2020.

The DHS report provides a roadmap on how the administration will accomplish the goals set forth in the president’s January 31st order. The report analyzes how e-commerce platforms, online third-party marketplaces and other parties in the global supply chain facilitate the import and sale of infringing goods. DHS states that it has devised a plan to “fundamentally realign incentive structures and thereby encourage the private sector to increase self-policing efforts” to fight the import of counterfeit and pirated goods. DHS will implement regulations to include:

  • Ensuring that “all appropriate parties to import transactions are held responsible for exercising a duty of reasonable care.” This effort will include extending liability to parties well beyond the traditional importer of record, including warehouses, fulfillments centers, and e-commerce platforms that handle infringing goods. DHS explicitly stated that CBP would be charged with advising the Department of Justice on the types of customs violations that are actionable under the False Claims Act and publishing information on successful FCA claims.
  • Increasing scrutiny on so-called “Section 321” import entries (entries with a value of $800 or less). E-Commerce platforms and other online vendors are responsible for the vast majority of these low-valued imports that generally have avoided government inspection when imported by express couriers and the U.S. Postal Service (USPS).
  • Prohibiting non-compliant companies and individuals from participating in CBP’s Importer of Record Program. This prohibition could have a lasting impact, as the government “shall consider all appropriate action” to ensure that persons or entities debarred or suspended by CBP are excluded from the Importer of Record Program. This effort will require express consignment operations, carriers, and hub facilities to verify and refuse to engage in activities requiring an importer of record number with persons or entities that have been suspended, debarred, or ineligible for the Program under the criteria to be established. There will be increased scrutiny of international mail posts and efforts to reduce the international shipment of illicit goods.
  • Pursuing civil and criminal fines, penalties, and injunctive actions against third party intermediaries dealing in infringing goods. This pursuit not only addresses enforcement actions under existing laws and regulations, but also indicates that DHS will seek statutory changes to enhance its enforcement power.
  • Analyzing whether the fees collected by CBP are sufficient to cover the costs associated with processing, inspecting, and collecting duties, taxes and fees for courier packages.

In the executive order, the president adopts the DHS measures and directs the appropriate government departments and agencies to begin implementation. The president states that the government will impose significant penalties on parties that fail to comply with the new measures. Any parties or person “who knowingly, or with gross negligence, imports, or facilitates the importation of, merchandise into the United States in material violation of Federal law evidences conduct of so serious and compelling a nature” will be referred to CBP to determine whether the parties should be allowed to participate in procurement and non-procurement transactions with the federal government. The order further states that CBP will be enforcing its discretionary authority to suspend and debar parties that run afoul the customs laws and ban them from importing goods into the United States.

Specific actions outlined in the order include:

  • Instructing DHS to initiate a notice of proposed rulemaking establishing criteria for importers to obtain an importer of record number, and impose requirements for express couriers, hub facilities, and customs brokers to report parties that attempt to circumvent the new importer of record program.
  • Directing the USPS, in conjunction with the Department of State, to extend the importer of record requirements to international postal shipments and monitor non-compliance by international posts.
  • Requiring CBP and ICE to publish information about seizures of goods involving intellectual property violations, illegal drugs and other contraband, incorrect country of origin, undervaluation, and other violations of law.

Ramifications

The effect of the president’s executive order will be wide ranging on e-commerce platforms, service providers, and government contractors. Up until now, the importer of record has been the primary party liable for penalties and enforcement actions associated with infringing imported goods. CBP usually would pursue parties such as customs brokers, warehouse operators, or e-commerce platforms only if they knowingly aided or abetted an importer in the importation of illegal goods. The initiative seeks to extend liability beyond the importer of record for gross negligent actions by a service provider that “facilitated” the import of such goods, an effort that likely would require additional statutory authority. The executive order makes clear that the government will consider criminal enforcement actions where appropriate.

International Trade Supply Chain – E-Commerce Platforms and Service Providers

The administration’s executive order will impact e-commerce and other online third-party platform businesses. The platform business often requires sellers to serve as the importer of record of goods sold on their platforms, thereby avoiding duty and penalty liability for illegally imported goods. The new initiative likely will impose requirements that may limit the ability of non-resident importers to serve as the importer of record, such as increased bonding requirements and more extensive information reporting requirements. More importantly, the crackdown on Section 321 shipments will slow down their entry due to increased inspections and enforcement measures by CBP, thereby delaying the fulfillment of online orders to customers.

The liability of platforms and service providers could also increase. A company other than the importer of record could face enforcement liability for infringing imports even if it is not the importer of record if it “facilitates” the imports by grossly negligent actions. It isn’t a stretch to predict that CBP would find that most companies in the global supply chain – customs brokers, carriers, warehouse operators, and e-commerce platforms – facilitate the entry of goods imported by their customers. The lower level of culpability sought by the administration will increase the liability of companies and require new procedures and business structures to mitigate risk.

Government Contractors and Present Responsibility

The administration’s executive order will particularly impact government contractors that are also importers of record. Those entities that have a dual role must ensure that they do not “flout the customs law,” or engage in any other activity whereby they could be found not presently responsible, as such acts could lead to debarment or suspension by CBP. Such a finding is required to be published in the System for Awards Management (SAM), the electronic roster of suspended and debarred individuals or companies excluded from Federal procurement and non‐procurement programs throughout the U.S. Government. Conversely a government contractor that is suspended or debarred will likely not be able to be an importer of record. This additional layer will likely require additional review to one’s supply chain to ensure that the presently responsible entities can be deemed importers of record and/or be limited by the CBP as the agency considers various criteria consistent with applicable law.

Additionally, the CBP is required to develop new standards to measure efforts by foreign postal services providers to reduce counterfeit shipments. Foreign postal services that fail these standards may be subject to greater inspection of their shipments or be blocked from importing into the U.S. This could affect government contractors that ship goods through non-compliant international posts as their goods may be swept into the inspection or they may need to redirect shipments through compliant posts.

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On March 3rd, the Antitrust and Public Contract Law Sections are hosting a joint meeting to discuss the Department of Justice’s new Procurement Collusion Strike Force (PCSF). Attendees will have the opportunity to hear directly from DOJ representatives as they provide their insights into the PCSF. The meeting will be held at the offices of Crowell & Moring from 12:30-2:00 pm, with the panel commencing at 1:00 pm. Lunch will be available for a charge of $10.00. Please RSVP to Victoria Walker at vwalker@crowell.com if you will attend in person or would like to participate by telephone.

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Today, in Acetris Health, LLC v. United States, the Federal Circuit held that a pharmaceutical manufactured in the United States qualified for sale, under the TAA, to the Department of Veterans Affairs even though the active pharmaceutical ingredient (API) came from a non-designated country, India. In reaching this decision, the court questioned, without deciding, the longstanding Customs and Border Enforcement position that the country where the API was manufactured defined the location of “substantial transformation” for any resulting pharmaceutical. In any event, the court held that under the Federal Acquisition Regulation definition, to qualify as a “U.S.-made end product” under the TAA, the product need be either “manufactured” in the U.S. or “substantially transformed” in the U.S. – it need not be both.

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In Tolliver Group, Inc v. U.S. (Jan. 22, 2020), the Court of Federal Claims granted summary judgment in favor of a contractor who sought reimbursement of legal fees incurred in successfully defending against a False Claims Act (FCA) suit filed by a relator. The qui tam action arose from a defect in the original contract—the government was contractually obligated to provide certain technical data that it could not provide and the contractor was required to certify that its performance was in compliance with the technical data.

After the Fourth Circuit affirmed the dismissal of the FCA suit, the contractor submitted a claim to recover a portion of its legal fees, which the contracting officer denied. The Court of Federal Claims ruled in favor of the contractor under the Spearin doctrine, which provides that if the government supplies defective specifications, then a contractor may recover costs flowing from the government’s breach of the implied warranty that satisfactory performance will result from adherence to the contract specifications. One exception to the Spearin doctrine is that the warranty does not extend to third-party claims. However, the court held that a qui tam suit is not an excepted third-party claim, because “in qui tam litigation ‘it is the government, not the individual relator, who is the real plaintiff in the suit.’” The Tolliver decision illuminates a new basis for recovery of litigation costs after defending against qui tam actions.

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In Ingham Regional Medical Center v. U.S. (Jan. 6, 2020), the Court of Federal Claims compelled production of certain government investigatory documents that the Court found were not privileged work product prepared “in anticipation of litigation.” The Medical Center sued to recover payments for outpatient healthcare services performed in connection with DoD’s TRICARE program after initial settlement discussions had failed. During discovery, the government inadvertently produced several documents that assessed the accuracy of its previous payments to the Medical Center, including documents that had been repeatedly logged as privileged. Although the government claimed that the documents were prepared in anticipation of litigation, the court held that the documents did not constitute protected work product because they were produced in furtherance of a business purpose (i.e., payment investigation) well before a genuine threat of litigation arose. The court equated the government’s function in assessing the hospital’s claims for alleged underpayments to that of an insurer who investigates a claim before making a final determination. Therefore, since the threat of litigation was too remote, the court found that the work product had been prepared for a possible negotiated business settlement between the parties, rather than for litigation. Contractors and others engaged in litigation with the government should keep “ordinary course of business” arguments in mind as a basis to challenge government privilege assertions.

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This week’s episode covers DoD 5000 series, CUI protection, and Anti-Kickback Act news and is hosted by partner Peter Eyre. Crowell & Moring’s “Fastest 5 Minutes” is a biweekly podcast that provides a brief summary of significant government contracts legal and regulatory developments that no government contracts lawyer or executive should be without.

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The Department of Defense (DoD) has released Version 1.0 of the Cybersecurity Maturity Model Certification (CMMC), Appendices A-F, and an Overview Briefing. While Version 1.0 largely mirrors the draft Version 0.7, the final version includes notable revisions, such as:

  • Process and Practice Descriptions in Appendix B, which include discussions and clarifications for every “practice” within each CMMC Level, including the long-awaited examples for Levels 4 and 5; and
  • Source Mapping in Appendix E, which maps each “practice” across all five Levels –171 in total – to other pre-existing cybersecurity frameworks.

Much, however, remains to be done. In anticipation of the DoD adopting “go/no-go” CMMC certification requirements later this year, a privately-run Accreditation Body is expected to begin training third-party assessors (3PAOs) this spring in conducting those certifications for contractors. Simultaneously, the DoD is expected to issue a proposed rule incorporating the CMMC into DFARS 252.204-7012, to be finalized this fall.

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The third year of False Claims Act (FCA) enforcement under the Trump administration was defined by a number of notable settlements, the implementation of several policy changes announced last year concerning how the Department of Justice (DOJ) will pursue (and in some instances, dismiss) cases under the FCA, and a Supreme Court decision addressing the statute of limitations circuit split. These highlights are among the important developments discussed by C&M attorneys in a “Feature Comment” published in The Government Contractor, which considers key issues impacting FCA liability, such as the increased risk associated with cybersecurity noncompliance, small business fraud, and the continued significance of materiality post-Escobar.