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This week’s episode covers the DOJ’s first charges under the Procurement Collusion Strike Force, an interesting bid protest decision involving COVID impacts, a DCMA development focusing on TINA, and an update on SAM.gov-generated unique entity identifiers, and is hosted by partner Peter Eyre and associate Michelle Onibokun. 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 NAACP Legal Defense and Education Fund, Inc. has filed suit on behalf of the National Urban League and the National Fair Housing Alliance in the United States District Court for the District of Columbia challenging the lawfulness and validity of Executive Order 13950, Combating Race and Sex Stereotyping, issued on September 22, 2020. The EO prohibits the use by federal contractors or subcontractors, and certain federal grantees, of training materials that “inculcate[ ] in its employees any form of race or sex stereotyping or any form of race or sex scapegoating.” The Department of Labor has since released its own guidance regarding the EO and a Request for Information seeking materials “concerning workplace trainings involving prohibited race or sex stereotyping or scapegoating” and has set up both email and phone hotlines to receive complaints about training that may violate the EO.

The suit names as defendants President Trump, Eugene Scalia in his capacity as Secretary of Labor, and the Department of Labor itself, and identifies the representative class as federal contractors and federal agencies, departments, or divisions that offer or intend to offer workplace training of the type prohibited by the EO. The suit alleges:

  1. An ultra vires action in violation of the First Amendment in the form of viewpoint discrimination;
  2. A violation of the Fifth Amendment, namely that the EO is void for vagueness; and
  3. A violation of the Equal Protection clause of the Fifth Amendment.

The Complaint seeks a declaratory judgment that the EO is unlawful and invalid, pursuant to 28 U.S.C. § 2201, and a preliminary and permanent injunction to stop implementation or enforcement of any part of the EO, as well as costs and fees.

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Crowell & Moring’s “All Things Protest” podcast keeps you up to date on major trends in bid protest litigation, key developments in high-profile cases, and best practices in state and federal procurement. In this episode, hosts Rob Sneckenberg and Christian Curran interview Anuj Vohra regarding GAO’s recent decision finding an apparent conflict of interest due, in part, to weekly social gatherings for “camaraderie, friendship, dinner, and . . . competitive foosball.”

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In Chronos Solutions et al., GAO sustained a pre-award protest challenging the terms of a solicitation issued by the United States Department of Housing and Urban Development (HUD). The solicitation sought asset management services to support the disposition of properties conveyed to HUD following foreclosure of loans guaranteed by the Federal Housing Authority. The solicitation was initially issued in June 2019, but HUD encountered multiple delays, including a prior pre-award bid protest. Following that protest, on April 27, 2020, HUD issued a solicitation amendment that changed the procurement to a total small business set-aside and reset the deadline for receipt of proposals to June 30, 2020, but did not update the solicitation’s original 2019 estimated quantities of services.

Three potential offerors filed pre-award protests, alleging that HUD had failed to account for the effects of the COVID-19 pandemic on the real estate market. In particular, the protesters argued that the public policy response, including foreclosure protections included in the Coronavirus Aid, Relief, and Economic Security Act (CARES Act), would dramatically distort the number of foreclosures over the life of the resulting contracts by first depressing the number of foreclosures while the CARES Act protections were in place, and then by prompting a significant upsurge in foreclosures once those protections expired. As a result, the protesters asserted the solicitation’s estimated quantities did not reasonably reflect HUD’s actual requirements, and challenged the decision to set the procurement aside for small business.

GAO sustained the protest, finding that HUD unreasonably failed to consider that the pandemic and resultant legislation had materially changed HUD’s requirements. GAO rejected HUD’s argument that because the solicitation anticipated the award of Indefinite-Delivery Indefinite-Quantity (IDIQ) contracts, it was not required to consider the impact of such changes. GAO explained that the IDIQ contract type did not relieve the agency of its obligations to provide reasonable estimates of anticipated work volumes. And because the estimates provided in the solicitation were based on historical data that HUD acknowledged was unlikely to be representative of what contractors would experience during performance, GAO found the agency’s failure to make any attempt to update the estimates or otherwise amend the solicitation to account for the COVID-19 pandemic was unreasonable. Anticipating that reconsideration of these issues could also impact the small business set-aside rationale, GAO also recommended that HUD revisit its set-aside decision as well.

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Late Friday, the Department of Justice announced its first charges under the Procurement Collusion Strike Force. A federal grand jury seated in the Eastern District of North Carolina returned a six-count indictment against Ohio-based Contech Engineered Solutions LLC and its former executive for their involvement in a decade-long conspiracy to rig bids for North Carolina Department of Transportation contracts. The contracts were funded by both the U.S. government and the state of North Carolina, and involved aluminum drainage structure projects adjacent to roads, bridges, and overpasses.

The Raleigh-based executive charged in the indictment was the employee responsible for supervising the preparation and submission of bids in response to the relevant NC DOT opportunities. The indictment alleges that, in advance of submitting bids on behalf of his employer, the executive contacted – or directed his subordinate to contact – employees at the co-conspirator, requested the co-conspirator’s bid pricing, and then used that information to finalize bids on behalf of Contech, in violation of the Sherman Act. In addition to the antitrust counts, the defendants were also charged with mail and wire fraud related to knowingly submitting fraudulent statements that their proposals had been submitted “competitively and without collusion.”

Notably, the Eastern District of North Carolina is not one of the PCSF’s partner districts, suggesting that the reach of the PCSF has extended farther than initially expected. Underscoring the mission of the PCSF and the scrutiny of public procurements, the U.S. Attorney for the district remarked, “Here, the defendants are accused of having conspired to violate those laws and to deprive the people of North Carolina of both the best service and the best pricing. Prosecution of these types of cases is critical to ensuring fairness and integrity in our public contract bidding system.”

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Companies have less than one week to submit comments regarding a recent interim rule that provides the responsibilities, processes, and procedures for the Federal Acquisition Security Council (“FASC”), established by the Federal Acquisition Supply Chain Security Act of 2018.  Under the immediately effective interim rule, the FASC is responsible for assessing supply chain risk and making removal and exclusion recommendations to the Secretary of the Department of Homeland Security (“DHS”), Secretary of the Department of Defense (“DoD”), and Director of National Intelligence (“DNI”).  Based on these recommendations, DoD, DHS, and the Office of the DNI (“ODNI”) then have authority to issue exclusion and removal orders for sources and/or covered articles deemed to pose a supply chain risk from certain procurements.

The interim rule is divided into three sections.  As further described below, Subpart A provides key definitions, outlines the membership of the FASC (including representatives from at least 12 agencies or departments), and describes the FASC’s authority to request information and establish subordinate bodies.  Subpart B establishes the DHS Cybersecurity and Infrastructure Security Agency (“CISA”) as the subordinate body for the collection of supply chain risk information from executive agencies and the Interagency Supply Chain Risk Management Task Force as the subordinate body for the analysis of that information.  The interim rule also provides guidance on mandatory and voluntary supply chain risk information submissions.  Finally, Subpart C focuses on the FASC’s removal and exclusion recommendation process, as well as the process for review of those recommendations.

Information-Sharing with the FASC.  Executive agencies are required to submit supply chain risk information to CISA when (1) the FASC requests information relating to a particular source[1], covered article[2], or covered procurement[3]; or (2) the agency has determined there is a reasonable basis to conclude there is a substantial supply chain risk associated with a source, article, or covered procurement.

Contractors and any federal or non-federal entity may voluntarily submit information to the FASC that relates to supply chain risk management, covered articles or procurements, or sources.  The interim rule provides some protection for the submitted information, but the relationship between the FASC’s information protections and Freedom of Information Act requests remains unclear.  To be afforded information protections, submissions to the FASC should include proper markings, handling, dissemination, and use restrictions including IP markings, business confidentiality markings, or contractual dissemination restrictions.  The rule states that the FASC, its Task Force, and CISA will handle the information in accordance with the markings provided.

Removal and Exclusion Recommendations.  The FASC may evaluate sources or covered articles (1) upon referral to the FASC or to a member of the FASC; (2) upon written request by an executive agency; or (3) based on information that is submitted to the FASC on a mandatory or voluntary basis and that the FASC deems credible.  The Council will then evaluate the sources or covered articles based on a series of non-exclusive factors including foreign ownership, control, or influence; security breaches; access to sensitive information; and other relevant supply chain risk information.  As part of this analysis, the FASC also must conduct due diligence, such as (1) reviewing information available to the FASC; (2) evaluating and accounting for the level of confidence in the information provided and; (3) examining public and commercially-available information as necessary or appropriate.  The FASC then prepares a recommendation for DoD, DHS, and ODNI.  The recommendation must include a summary of the basis for the recommendation and the assessment conducted, the scope of the recommendation, information for identifying the sources or covered articles, and any possible mitigation steps that would change the FASC’s recommendation.  Any source named in a recommendation will be provided notice of the FASC’s recommendation and may respond to the recommendation with additional information or argument.  The FASC will not release any recommendations to a non-federal entity unless a decision on whether to issue an exclusion or removal order has been made by DoD, DHS, and ODNI and the affected source has been notified of the decision.

Removal and Exclusion Orders.  The Secretary of DHS, the Secretary of DoD, and the DNI will review the Council’s recommendations, accompany information, and source-submitted information to determine whether to issue a removal or exclusion order.  A DoD, DHS, or ODNI order is only applicable to the specific agencies under the DoD, DHS, or ODNI’s purview as identified in the rule (see Removal and Exclusion Order Applicability graphic).  Orders must be reviewed annually and may be modified or rescinded; however, modifications may not apply more broadly than the initial order.  Named sources, CISA, appropriate Congressional Committees and leadership, and the Interagency Suspension and Debarment Committee will be notified of an issued order.  An exclusion order may require the exclusion of covered sources or articles from federal procurement activities (as a prime contractor or subcontractor at any tier), and/or could require removal of covered articles from federal or contractor information systems.  And in the event that DHS, DoD, and ODNI all issue removal or exclusion orders that amount to a government-wide exclusion, then the Federal Supply Schedules (“FSS”) and government-wide acquisition contracts shall facilitate implementation by removing covered articles or sources identified in the removal and exclusion orders from such FSS and multi-agency contract vehicles.

Removal and Exclusion Order Applicability

Comments on the interim rule are due no later than November 2, 2020.  Because of the potential costly impact of the removal and exclusion orders, as well as their mandatory ties to the Interagency Suspension and Debarment Committee, contractors should carefully consider the interim FASC process.

The FASC interim rule was one of many pieces of supply chain security-related news in September, along with the long-awaited DFARS cybersecurity rules and the National Counterintelligence and Security Center Supply Chain Risk Management Summary Publication.  With the 2021 NDAA around the corner and 2020 NDAA microelectronics standards deadline looming, this will continue to be an active area for counsel to follow.  For up to date information on Supply Chain Security and Risk Management developments, see Crowell’s SCRM site here.

 

[1] A “source” is a non-federal supplier, or potential supplier, of products or services, at any tier.

[2] A “covered article” is any of the following:

(1) Information technology, including any equipment or interconnected system or subsystem of equipment, used in the automatic acquisition, storage, analysis, evaluation, manipulation, management, movement, control, display, switching, interchange, transmission, or reception of data or information by the executive agency, if the equipment is used by the executive agency directly or is used by a contractor under a contract with the executive agency that requires the use of such equipment; computers, ancillary equipment (including imaging peripherals, input, output, and storage devices necessary for security and surveillance), peripheral equipment designed to be controlled by the central processing unit of a computer, software, firmware and similar procedures, services (including support services), and related resources; and cloud computing services of all types;

(2) Telecommunications equipment or telecommunications service (meaning equipment, other than customer premises equipment, used by a carrier to provide telecommunications services, and includes software integral to such equipment (including upgrades) and telecommunications offerings for a fee directly to the public, or to such classes of users as to be effectively available directly to the public, regardless of the facilities used);

(3) The processing of information on a Federal or non-Federal information system, subject to the requirements of the Controlled Unclassified Information program or subsequent U.S. government program for controlling sensitive unclassified information; or

(4) Hardware, systems, devices, software, or services that include embedded or incidental information technology.

[3] A “covered procurement” is any of:

(1) A source selection for a covered article involving either a performance specification or an evaluation factor relating to a supply chain risk, or where supply chain risk considerations are included in the agency’s determination of whether a source is a responsible source;

(2) The consideration of proposals for and issuance of a task or delivery order for a covered article where the task or delivery order contract includes a contract clause establishing a requirement relating to a supply chain risk;

(3) Any contract action involving a contract for a covered article where the contract includes a clause establishing requirements relating to a supply chain risk; or

(4) Any other procurement in a category of procurements determined appropriate by the FASC, with the advice of the FASC.

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On September 30, the Office of the Undersecretary of Defense for Acquisition and Sustainment issued a memorandum titled “Delegation of Defective Pricing Authority to the Defense Contract Management Agency,” describing DCMA’s new, enhanced role in TINA audits and subsequent disputes. The memo states that DCMA has created a “Defective Pricing Pilot Team,” which will “provide support” to PCOs and DCAA auditors in connection with defective pricing matters. According to the memo: “Effective immediately” PCOs may delegate to DCMA traditional PCO functions under FAR 15.407-1(b), (d), and (e), to DCMA, and DCMA will take “all actions” to resolve defective pricing issues on such matters, including, inter alia, “issu[ing] contracting officer final decisions” and “litigat[ing] any appeal or case that results from delegated DCMA defective pricing actions.” While it remains to be seen how DoD customers will implement this delegation of authority, contractors facing defective pricing allegations should be aware that DCMA may play an increasingly visible role in negotiating and litigating TINA disputes going forward.

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In this episode, hosts Jacinta Alves and Mana Lombardo discuss DOJ FCA investigations and common mistakes that targets make in defending these investigations with partner Michael Shaheen. “Let’s Talk FCA” is Crowell & Moring’s podcast covering the latest developments with the False Claims Act.

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This week’s episode discusses the recent DFARS Interim Rule titled “Assessing Contractor Implementation of Cybersecurity Requirements” and is hosted by partners Peter Eyre and Kate Growley. 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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On October 2, 2020 (almost two months after the August 10, 2020 commencement of the acceptance period for forgiveness applications), the Small Business Administration (SBA) released an SBA Procedural Notice (the “Notice”) concerning required procedures for change of ownership of an entity that has received PPP loans (the “PPP Borrower”). Under the Notice, SBA approval or funding PPP loan balances into escrow may be required in connection with a change of ownership transaction and purchasers may be required to assume the PPP Borrower’s obligations, in addition to PPP Lender notice and approval.

Under the Notice, a “change of ownership” will be considered to have occurred when (1) at least 20% percent of the common stock or other ownership interest of a PPP Borrower is sold or otherwise transferred, whether in one or more transactions, including to an affiliate or an existing owner of the PPP Borrower, (2) the PPP Borrower sells or otherwise transfers at least 50% of its assets, whether in one or more transactions, or (3) a PPP Borrower is merged with or into another entity. The SBA further explained that to determine whether a change of ownership has occurred, all transfers of stock or other ownership interests since the date of the PPP loan would be aggregated. For publicly traded PPP Borrowers, only sales or transfers that result in one person or entity owning 20% or more of the PPP Borrower would be aggregated.

Under the Notice, prior to the closing of any change of ownership transaction, the PPP Borrower must notify the PPP Lender in writing of the contemplated transaction and provide the PPP Lender with a copy of the proposed agreements or other documents that would effectuate the proposed transaction.

Once the notification has been given to the PPP Lender, PPP Borrowers must provide notice to and obtain SBA’s prior consent to the change of ownership unless (i) the PPP loan has been fully satisfied through repayment, either by the PPP Borrower or by the SBA in response to a forgiveness application, (ii) the sale or transfer is of 50% or less of the common stock or other ownership interest of the PPP Borrower, or (iii) as set forth in more detail in the Notice, the PPP Borrower has completed a forgiveness application reflecting its use of the PPP loan and established an interest-bearing escrow account with the full amount of the balance of the PPP loan.

PPP Borrowers considering entering into a change of control transaction should note that, among other information to be included with the request for consent, the request must disclose a list of all owners of 20 percent or more of the purchasing entity. In addition, in transactions where SBA consent would be required, the transaction timeline should take into account that the SBA has sixty (60) days from receipt of a complete request to respond.

The Notice includes a number of additional requirements and further confirms that SBA approval of any change of ownership involving the sale of 50% or more of the assets of a PPP Borrower will require (i) buyer assuming all of the PPP Borrower’s obligations under the PPP loan, including responsibility for compliance with the PPP loan terms, and (ii) the purchase or sale agreement or a separate assumption agreement including appropriate language regarding the buyer’s assumption of the PPP Borrower’s obligations under the PPP loan.

In the case of a change of ownership not involving an asset sale, including a merger, the PPP Borrower or its successor entity would remain responsible for (1) performance of all obligations under the PPP loan, (2) the certifications made in connection with the PPP loan application, including the certification of economic necessity, and (3) compliance with all other applicable PPP requirements.

Crowell & Moring will continue to monitor and provide updates regarding developments in the PPP.