In AeroVironment, Inc. (Mar. 30, 2016), following an apparent settlement of the government’s cost disallowance claim, the ASBCA denied the government’s request to amend its answer (in order to “clarify” entitlement to additional quantum) because the proposed amendments constituted new “claims” that required new final decisions. Acknowledging that parties may ordinarily revise quantum without running afoul of jurisdictional concerns, in this case the Board found that the proposed amendments (which were premised on a new interpretation of FAR Parts 3l and 42, a different calculation methodology, and greatly increased the monetary stakes), involved different “operative facts” and “would alter the ‘essential nature’ and fundamental basis of the claim asserted in the final decisions,” over which the Board lacked jurisdiction.
In this year’s set of legislative proposals forwarded to Capitol Hill, DoD and NASA have again requested changes to the Program Fraud Civil Remedies Act (“PFCRA”) to create, in the government’s view, a more viable administrative remedy for fraud and false claims totaling less than $500,000. The administrative process would proceed similarly to the suspension and debarment process with a fixed administrative record and an administrative decision official within each agency. See proposed Section 805 in the Fifth Package of Legislative Proposals Sent to Congress for Inclusion in the National Defense Authorization Act for Fiscal Year 2017.
PFCRA (Chapter 38 of Title 31, United States Code) was enacted in 1986 as a government wide administrative mechanism for combating small-dollar fraud. As it stands, PFCRA allows federal executive branch agencies, with Department of Justice (“DoJ”) approval, to address false, fictitious, or fraudulent claims and statements where the alleged liability is less than $150,000. At the time of its enactment, Congress considered PFCRA to be a remedy to DoJ’s declination to pursue criminal or civil penalties where the alleged fraudulent activity resulted in little to no financial loss to the government. Since then, however, PFCRA has been viewed by some government agencies, including the DoD, as being cumbersome to the point of making it impractical for government agencies to pursue a remedy under the Act. Indeed the purpose for the proposed amendments is to create an “effective” administrative remedy.
Earlier this week, the Department of Veterans Affairs (“VA”) announced a seismic shift in policy that opens VA Schedule 65 IB to covered drugs that do not comply with the Trade Agreements Act (19 U.S.C. §2501 et seq.) (“TAA”). While the VA’s prior policy prohibited contractors from offering TAA non-compliant drugs from on a Federal Supply Schedule (“FSS”) contract, the VA’s new policy requires “that all covered drugs, regardless of county of substantial transformation, be available on a 65 I B FSS contract.”
Under the TAA, the Buy American Act is waived for end products that are “substantially transformed” in so-called “designated countries”; i.e. those countries with which the U.S. is a party to bilateral and multilateral free trade agreements as well as certain other countries receiving preferential treatment (“Least Developed” and “Caribbean Basin” countries). At the same time, the TAA prohibits the procurement of end products whose country of origin is a non-designated country (e.g., China, India, Malaysia). The TAA has a “non-availability” exception where the end products required are not offered, or cannot be fulfilled by U.S. or designated country end products. However, VA policy prohibited contracting officers from making non-availability determinations for FSS contracts – until now.
The shift in policy empowers VA Contracting Officers to make individual non-availability determinations and waive TAA requirements when two hurdles are overcome (i) the offered drugs or similar drugs are not TAA-compliant and (ii) the drug being offered is a covered drug under the Veterans Healthcare Act. This policy change allows the VA to make available on 65 IB Schedule contracts those covered drugs formerly excluded due to the TAA non-compliant status. Given the requirements under the new policy, it appears the VA intends to apply this non-availability exception to all covered drugs from non-designated countries, such as China and India.
The VA has set an aggressive timeline for implementing its new policy. The first deadline is this Tuesday– April 26, 2016. By this date, pharmaceutical manufacturers must submit their Non-Federal Average Manufacturer’s Price (“Non-FAMP”) calculations to the VA’s Office of Pharmacy Benefits Management Services (“PBM”) for TAA non-compliant drugs.
By May 6, 2016, manufacturers currently holding VA FSS contracts must submit a Request for Modification (“RFM”) to add non-TAA compliant products to their existing FSS contracts. Additionally, these contractors must execute a mass modification, which includes a “Trade Agreements Act Non-Availability Determination Request Letter”. This letter requires contractors to list all non-TAA compliant covered drugs and verify that their currently marketed National Drug Codes (“NDC”) have no TAA compliant versions, including authorized generics. The Contracting Officer may then make a non-availability determination based on this statement and its representations in the System for Award Management (“SAM”).
Manufacturers without a VA FSS contract, likely because their only covered drugs are TAA non-compliant, are required to at least enter into Interim Agreement (“IA”) by the May 6, 2016. The purpose of the IA is to require the manufacturer to make its covered drugs available to the Government while negotiating a VA FSS contract – a process that can take several months.
All TAA non-compliant drugs must be on an existing FSS 65 IB contract or a new IA by June 6, 2016.
Impact on Manufacturers
This change in VA policy should be music to the ears of pharmaceutical companies that manufacture covered drugs in China, India and other non- designated countries. By adding these products to VA FSS contracts, these manufacturers will have the opportunity for increased sales to various VA hospitals and other Government purchasers.
However, the VA’s ambitious deadlines may prove challenging for some manufacturers. Manufacturers that are not already calculating Non-FAMP pricing information for TAA non-compliant drugs will need to perform these calculations right away. Additionally, if a manufacturer prefers to dual-price, a calculation option under 38 U.S.C. 8126 that allows for the Big 4 (VA, Department of Defense, Public Health Service and Coast Guard) to be provided a lower price than other federal purchases under the FSS, it will likely require additional time and effort to negotiate the dual pricing under the FSS. Because the new guidance provides no information on the impact of failing to make these deadlines, manufacturer should make every effort to meet these deadlines and alert the VA of its compliance efforts if a deadline may be missed.
On April 15, 2016, the Acting Secretary of the Army issued Army Directive 2016-16 (Changing Management Behavior: Every Dollar Counts) stating that the Army will “eliminate ‘use or lose’ funding practices,” i.e., “commanders and staffs will not automatically decrement commands or programs in future allotments when they do not spend all funds without further investigation to evaluate the reason for the under-execution and determine if it was a onetime event or funding adjustments are needed.” Although a stated goal of the policy is to “allow [the Army organizations] to keep and redirect savings to validated command priorities,” Congress still appropriates funding on a “use or lose” basis and any annual funds not obligated by the end of the year will continue to expire despite the new Army policy.
On January 14, 2016, the U.S. Department of Defense (DoD) issued Directive 4715.21 to organize comprehensive agency-wide action to address and mitigate the risks of climate change on U.S. military assets and operations. The Directive implements for DoD the requirement established by Executive Order 13653 (Preparing the United States for the Impacts of Climate Change) that each federal agency develop and institute policies designed to improve climate resilience. It also follows several DoD reports and assessments of the military’s 7,000 bases, installations and facilities that found that climate change poses a present security threat.
The Directive states that to maintain an effective military, DoD “must be able to adapt current and future operations to address the impacts of climate change” and must do so by (1) identifying the effects of climate change on DoD’s mission, (2) taking those effects into consideration when developing plans and implementing procedures, and (3) anticipating and managing climate change risks.
The Directive establishes and assigns responsibilities for integrating climate change considerations into DoD planning throughout the Office of the Secretary of Defense (OSD). The Undersecretary of Defense for Acquisition, Technology and Logistics (USD(AT&L)) is charged with control and management of overall DoD climate risk policy and the management of climate-related risks. Under the oversight of the USD(AT&L), among others:
- The Assistant Secretary of Defense for Energy, Installations and Environment (ASD(EI&E)) will serve as the primary DoD adaptation official, and have responsibility for inter-agency coordination and providing guidance and direction on relevant technologies, standards and approaches.
The Assistant Secretary of Defense for Logistics and Materiel (ASD(L&MR)) will have responsibility for considering climate change risks posed to logistics infrastructure, materiel acquisition and supply, and transportation modes.
The Assistant Secretary of Defense for Acquisition (ASD(A)) will oversee integration, in accordance with DoDD 5000.01 and DoDI 5000.02, of climate change considerations – including greenhouse gas and lifecycle analyses, in (i) DoD acquisitions of weapon systems, platforms, equipment, and products, (ii) acquisition strategies, and (iii) defense acquisition workforce training and education.
In addition, the twelve OSD offices along with DoD Component Heads, the Chairman of the Joint Chiefs of Staff, and the Combatant Commanders, are charged with: integrating climate change considerations into DoD policy, guidance, plans and operations; assessing and managing risks to infrastructure (e.g. construction, asset management, utility systems), capabilities and capacity (e.g. force structure, basing, military operations, stability); managing vulnerabilities to acquisition and supply chains, and integrating resource considerations and cost management, including life-cycle costs, into DoD plans, business processes, material management, acquisition strategies, and all associated investment and risk management processes at “all relevant levels” within the DoD.
While the Directive provides broad, top-level climate change policy, it is likely that there will be multiple new or modified policies, standards, guidelines and DoD regulations to implement the broad policies into practice. As with so much federal policy today, government contractors will be on the front lines of implementation. Consequently, in the coming months there are a variety of questions that may be answered, including:
• When will DoD contracting activities begin adding climate change considerations into evaluation criteria? How will DoD measure such climate change considerations in competitive acquisitions?
• When will DoD implement the climate change policy in the Defense Federal Acquisition Regulation Supplement (DFARS)? What shape will the DFARS implementation take?
• What impact will the Directive have on existing DoD contracts and programs?
• How widely will DoD require considering, monitoring, and reporting on greenhouse gas emissions and lifecycle impacts? To what extent will contractors be required to measure and mitigate climate change risks?
• Will all energy-related infrastructure, or transport modes and equipment, be evaluated based on long-term climate resilience metrics?
• Will additional energy and fuel usage requirements be imposed on contract awardees?
• What opportunities exist for contractors to shape the answers to these questions? What new risks do contractors face from the Directive and forthcoming implementation efforts?
As DoD continues to build energy and environmental considerations into its operations and acquisitions, we are available to assist our clients to take advantage of these new opportunities and to navigate and mitigate the associated risks.
On April 19, 2016, the Supreme Court heard oral argument in U.S. v. Universal Health Servs., Inc., which concerns (1) whether the implied certification theory of legal falsity under the FCA is ever viable; and (2) if it is, whether a contractor’s reimbursement claim can be legally false under that theory if the contractor fails to comply with a statute, regulation, or contractual provision that is not an explicit condition of payment. In a post on the Whistleblower Watch Blog, C&M attorneys share first impressions from yesterday’s argument and examine the significance of the case for government contractors who could face potential FCA exposure for failure to comply with myriad contract provisions or regulations.
On April 12, the DOJ and FTC issued a joint statement titled “Preserving Competition in the Defense Industry,” which reiterates the analytical framework for reviewing defense industry mergers and acquisitions set forth in the DOJ/FTC 2010 Horizontal Merger Guidelines, and emphasizes that the antitrust agencies will continue to give substantial weight to the DOD’s own internal assessment of such transactions – highlighting the need for companies in the defense industry to adopt a coordinated strategy when pursuing strategic transactions. According to the accompanying press release, the agencies “thought it timely to reinforce [the] message” that they remain “committed to preserving competition for current and future defense procurement … [i]n light of recent speculation about possible future consolidation,” an indication to companies considering defense industry mergers and acquisitions that the cognizant oversight agencies are likely to remain active in reviewing such transactions.
On April 5, 2016, the Fraud Section of the Department of Justice’s Criminal Division launched a one-year pilot program under which companies can receive tangible credit for self-reporting violations of the Foreign Corrupt Practices Act. The rewards for self-reporting, cooperation and remediation can include avoidance of a corporate monitor, a substantial fine reduction, or declination of prosecution entirely.
In a memorandum released yesterday, Fraud Section Chief Andrew Weissmann highlighted recent enhanced enforcement efforts, including the 50% increase in FCPA Unit prosecutors, the establishment of three FBI International Corruption Unit squads devoted to FCPA investigations, and the further strengthening of cooperation with international law enforcement bodies.
Assistant Attorney General Leslie Caldwell said that incentivizing companies to self-report FCPA misconduct and cooperate by offering tangible benefits will also enhance the Fraud Section’s ability to prosecute culpable individuals. In this respect, the pilot program is a logical next step following the September 9, 2015, Individual Accountability memorandum issued by the Deputy Attorney General (“Yates Memorandum”).
In addition, AAG Caldwell stressed that the pilot program was part of DOJ’s ongoing effort to bring more transparency to the Department’s process of resolving FCPA cases, stating that transparency informs companies what conduct will result in what penalties and what sort of credit they can receive for self-disclosure and cooperation with an investigation. This, in turn, enables companies to make more rational decisions when they learn of foreign corrupt activity by their agents and employees.
By now, government contractors are largely aware of the information gathering and reporting requirements of the Fair Pay & Safe Workplaces Proposed Rule (“Fair Pay”), but whether and how to package the information proactively for the government has received less attention. Contractors would also be well served to consider their messaging and outreach efforts in proposals and, if necessary, in meetings with Suspending and Debarring Officials (SDOs) before the Fair Pay final rule issues or shortly after its effective date.
Assuming the final Fair Pay rule to be issued later this Spring mirrors the proposed rule, it will require disclosure of a variety of adverse findings, including “administrative merits determination,” “arbitral award or decision,” or “civil judgment” decisions rendered against the contractor within the preceding three-year period for violations of 14 enumerated federal labor laws and “equivalent state laws.” Multiple disclosures are necessary before award and every six months during contract performance. Gathering and reporting this information is a Herculean task and has consumed significant legal department time in recent months. But legal departments should also consider how the government will use the information, and whether proactive outreach and messaging to government customers is also necessary to protect the company.
After the government receives Fair Pay disclosures, the contracting officer will request analysis from a new category of official – a labor compliance advisor – who will focus on whether the violations are serious, repeated, willful, or pervasive. The contracting officer can then decide whether to award a contract, exercise an option, terminate a contract, or refer the matter to the agency SDO.
There are three federal officials of note who will interact with a contractor’s history of labor violations: the contracting officer, the labor compliance advisor, and the SDO. Two of those officials – the contracting officer and the SDO – can materially, directly, and detrimentally impact the contractor. So contractors should be considering how to shape their communications and disclosures to address the needs of both of these officials.
Far too often, investors, including venture capital companies, assume that as long as they do not retain the largest shareholder interest in a company, that they cannot create affiliation problems impacting what is a key to companies’ initial success in government contracting: small business status. Wrong. A recent U.S. Small Business Administration (SBA) Office of Hearings and Appeals (OHA) decision makes this a stark reality, upholding a determination that an apparent awardee in a set-aside procurement is other-than-small based on affiliation arising from its mere 4.16 percent stock ownership interest in another company.
If a contractor has ever thought about certifying its size as small under a particular NAICS code, hopefully they reviewed the SBA regulations on affiliation in advance. The analysis of whether a company is small in size does not start and end with the receipts or number of employees for that company, but is instead considered as a spiderweb of connections with other individuals and entities. In order to determine a concern’s size, SBA counts not only the receipts or employees of the concern but also the receipts or employees of each of the concern’s domestic and foreign affiliates.
Concerns and entities are affiliates of each other when one controls or even has the power to control the other, or a third party or parties controls or has the power to control both. 13 C.F.R. § 121.103(a). In determining affiliation, there are numerous factors that the SBA must consider – including, ownership, management, and previous relationships with or ties to other concerns. SBA’s analysis concerns the totality of the circumstances; the absence of any single factor will not be considered dispositive.