As Congress considers legislation prohibiting government contractors from doing business in Russia, over 20 states have already acted. In this alert, we highlight: (i) how different states are defining Russian business operations, and the corresponding risks to differently situated government contractors; and (ii) unique aspects of certain state actions that contractors need to be aware of as they develop their compliance strategy.
Which Government Contractors are Affected by Which State Actions?
States have taken a wide variety of approaches to determining which contractors and actions to cover with their Russia-related prohibitions. For example:
- Several states, including Ohio and Virginia, are limiting their actions to Russian institutions and/or companies, but have not defined such terms.
- On the other hand, New Jersey and North Carolina are targeting entities that are headquartered or have their principal place of business in Russia, as well as such entities’ subsidiaries (with New Jersey also targeting entities in Belarus). See also proposed Louisiana legislation requiring any public entity to reject the lowest procurement bid if that bidder is “domiciled in Russia.”
- New York is taking yet a third—and much broader—approach and is targeting entities that conduct business operations in Russia, which includes entities: (i) conducting any commercial activity in Russia; (ii) transacting business with the Russian Government; or (iii) transacting business with commercial entities headquartered or with their principal place of business in Russia. See also proposed Alabama legislation encouraging the state “to disfavor Russian products and any economic activity that would benefit Ukraine, to the utmost extent possible.”
- Finally, certain states have not yet determined the precise scope of their restrictions. For example, Missouri currently has two competing bills: its Senate has proposed legislation that targets “companies that have active business operations in strategic industries with the Russian Federation”; whereas its House has proposed legislation that would cover “Russia, Russian entities, or any other country adversely occupying or attacking a North Atlantic Treaty Organization (NATO) member, Ukraine, Finland, Sweden, or Georgia; unless the transaction is authorized under Ukraine General License Number 18 issued on February 21, 2022, by the U.S. Department of Treasury’s Office of Foreign Assets Control.”
Government contractors—especially those doing business in multiple states—must carefully consider this evolving patchwork of prohibitions and restrictions as part of their overall compliance strategy.
What are the States Prohibiting, and How?
In addition to determining whether a given state’s proposed or enacted restrictions apply, government contractors must also closely scrutinize the nature of the prohibitions or restrictions at issue. As we discussed previously, most states are considering or have enacted prohibitions on future contracts with affected companies, and/or would require termination of existing contracts with such companies. However, certain states have passed or are contemplating actions with unique—and potentially extreme—consequences.
Most notably, New Jersey has already enacted legislation that requires a contractor to certify it is not on the Department of Treasury’s list of entities engaged in prohibited activities in Russia or Belarus before a contract is awarded, renewed, amended, or extended. For false certifications, the legislation requires: (1) a civil penalty in an amount that “is equal to the greater of $1,000,000 or twice the amount of the [contract] bid”; (2) “termination of an existing contract [or bid] . . . by the issuing agency”; and (3) exclusion from public contracting with the State for 3 years (and with reinstatement only allowed so long as the entity has ceased its engagement in prohibited activities in Russia or Belarus). These penalties significantly exceed the penalties under New Jersey’s state False Claims Act, and pose significant risk to any contractors that do business in the State. Indeed, they could have far reaching effects even beyond New Jersey, as many other states look to whether a company is banned from contacting in any jurisdiction.
Crowell is continuing to monitor these state actions and will highlight significant developments in future alerts. Government contractors should closely follow these issues and update their compliance practices accordingly.