On June 27, 2018, in Appeal of CiyaSoft Corporation, the Armed Services Board of Contract Appeals held that the Government can be bound by terms of a commercial software license agreement that the contracting officer (CO) has neither negotiated nor seen. CiyaSoft Corporation (CiyaSoft) submitted a claim asserting that the Army had breached its contract to purchase computer software by using more copies of the software than were permitted by the contract. The Army denied the claim, in part, because the contract contained no terms specifying how the government would secure and protect the software. Instead, CiyaSoft had included license terms limiting the software’s use (i) inside the box containing the CDs with the software, (ii) on a piece of paper inside the software’s shrinkwrap, and (iii) in clickwrap that was displayed during the software’s installation process. On appeal, the Board found that although the contract included no license terms and the CO never saw or discussed with CiyaSoft the license terms that accompanied the software delivery, the CO had a duty to inquire about what use rights applied to the software and the failure to do so imputed knowledge of the licensing terms on the Army. Pointing to the longstanding policy embodied in the FAR that that the government should accept commercial computer license terms that are customarily provided to other purchasers, the Board held that “the government can be bound by the terms of a commercial software license it has neither negotiated nor seen prior to the receipt of the software, so long as the terms are consistent with those customarily provided by the vendor to other purchasers and do not otherwise violate federal law.”
The final year of the Obama Administration has seen a flurry of activity that will affect the government contracting community. Appearing on WJLA’s Government Matters program (available here at govtmatters.tv), Crowell & Moring Chair Angela Styles discussed some of the latest changes that will impact industry including the GSA’s final rule on transactional data reporting; the Office of Federal Procurement Policy’s category management initiatives; and the Fair Pay and Safe Work Places Executive Order.
Beginning in June 2016, GSA will remove current wage determinations from existing MAS Schedules and require ordering agencies to incorporate determinations at the task order level to ensure that the “most recent” wage determinations are incorporated when an individual task order is placed. The recently announced change is part of GSA’s plan to “update” the process by which the Service Contract Act is incorporated into Multiple Award Schedules.
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 August 26, 2015, the DoD published an Interim Rule to implement DoD policy on the acquisition of cloud services. This Interim Rule provides a list of terms and conditions regarding cloud computing services to be used in DoD contracts for information technology services as well as introduces the requirement that offerors responding to DoD solicitations for information technology services must identify whether cloud computing services will be used in the resultant contract.
The Interim Rule adopts the policy that DoD’s cloud acquisitions should use commercial terms and conditions (such as those in End User License Agreements (EULAs) or Terms of Service (TOS)) to the extent that they are consistent with federal law and the agency’s needs. DoD’s embrace of commercial terms comes at an interesting time, given the General Services Administration’s recent class deviation that – at least in part – undermines the enforceability of certain terms in commercial supplier agreements.
The Interim Rule establishes uniform terms and conditions to be included in solicitations and contracts for information technology services. These terms and conditions cover:
- Cloud computing security requirements (including the requirement that cloud computing services providers maintain all Government data within the 50 states, the District of Columbia, or outlying areas of the United States unless otherwise authorized);
- Limitations on access to, and use and disclosure of Government data and Government-related data;
- The contractor’s obligation in the case of a cyber incident to report the incident, preserve and protect media, allow DoD with access to additional information or equipment for purposes of a forensic analysis, and provide all damage assessment information;
- Records management and facility access;
- The contractor’s obligation to notify the Contracting Officer of third party requests for access to Government data or Government-related data;
- The contractor’s obligations to address spillage in compliance with agency procedures; and
- A flowdown requirement that the substance of the clause be included in all subcontracts that involve or may involve cloud services, including subcontractors for commercial items.
The Interim Rule impacts more than just cloud service providers seeking to sell their services to DoD. The DoD has proposed that all solicitations for information technology services contain a clause that requires contractors to indicate whether the use of cloud computing is anticipated under the resulting contract or any subcontracts. Should a contractor indicate that it does not anticipate using cloud computing services in the resultant contract, the contractor would have to obtain the Contracting Officer’s approval prior to using cloud computing services.
Both new provisions – 252.239-7009, Representation of Use of Cloud Computing, and 252.239-7010, Cloud Computing Services – will be used in procurements for information technology services, including commercial item acquisitions under FAR part 12.
A brief background on DoD’s cloud computing acquisition strategy is necessary in order to place the import of this Interim Rule into context. In June 2012, the DoD Chief Information Officer (CIO) appointed the Defense Information Systems Agency (DISA) as DoD’s Enterprise Cloud Service Broker (ECSB) and required DoD components to acquire cloud services through the ECSB or obtain a waiver. This brokerage system was created to enable DoD components to use commercial cloud services that met FedRAMP low and moderate control levels, and make them available to other DOD components through standardized contracts and leveraged authorization packages. In a December 15, 2014 memo, entitled “Updated Guidance on the Acquisition and Use of Commercial Cloud Computing Services,” the DoD CIO lifted the requirement that DoD components purchase through the ECSB. DoD components are now allowed to acquire cloud services directly so long as it is done in accordance with the security requirements outlined in FedRAMP (the minimum security baseline for all DoD cloud services) and the DoD’s Cloud Computing Security Requirements Guide (SRG) (developed by DISA for more sensitive DoD unclassified data or missions and published in January 2015). The Interim Rule implements the new policies developed within the DoD CIO’s December 15, 2014 memo as well as the SRG Version 1, Release 1 to ensure uniform application when contracting for cloud services across the DoD.
Comments on the Interim Rule, which separately addresses possible expansion of the DFARS Safeguarding Rule, are due on or before October 26, 2015.
The General Services Administration (“GSA”) is rolling out two modifications to its Contractor Assistance Visits (“CAVs”), in-person or virtual meetings between GSA’s Industrial Operations Analysts (“IOAs”) and GSA Schedule holders to assess compliance, identify potential problems, and test the contractor’s system controls and processes. Tom Brady, the Director of the Supplier Management Division, GSA Office of Acquisition Management, presented on these changes during The Coalition for Government Procurement’s webinar on March 12, 2015.
First, GSA will no longer grade contractors on report cards. GSA’s current practice is to issue a MAS Administrative Report Card following each CAV. This grade was supposed to reflect how well a contractor was complying with its contract’s terms and conditions. But contractors had expressed concern that some interpreted the grade more generally to contract performance. In response to this concern, GSA will discontinue grading its contractors on report cards (and relatedly, commits to providing contractors feedback from the CAV more expeditiously). Continue Reading GSA Announces Changes in its Contractor Assistance Visits
On Wednesday, September 9th at 12 PM Eastern, join our government contracts attorneys for a webinar entitled: “Mitigating Trade Agreements Act Risks for GSA Schedule Holders.” During this 60-minute webinar, we will provide an overview of the GSA Schedule contract requirements related to the Trade Agreements Act (“TAA”), review recent enforcement actions by the government and whistleblowers against Schedule contractors for alleged violations of the TAA, and discuss how contractors can mitigate TAA non-compliance risks related to manufacturing processes and purchasing from suppliers.
Please note that Federal Publications Seminars charges a fee for this webinar. Registration information can be found here.
On March 13, 2014, the Department of Defense issued a memorandum titled “Class Deviation – Determination of Fair and Reasonable Prices When Using Federal Supply Schedule Contracts.” This memorandum directs DoD contracting officers to make their own determination of fair and reasonable pricing when using Federal Supply Schedules (also known as GSA or VA Schedule contracts), rather than rely on the fair and reasonable price determination made by GSA when GSA awards Schedule contracts. Specifically, the memorandum establishes a class deviation to FAR 8.404(d) that will be applicable to DoD entities buying off Schedule contracts. This deviation provides that “GSA has determined the prices of supplies and fixed-price services, and rates for services offered at hourly rates, to be fair and reasonable for the purpose of establishing the schedule contract.” But then it states: Continue Reading GSA Schedule Contracting: Has Selling to DoD Just Gotten Harder?
Just last week, the Department of Justice announced another large False Claims Act settlement with a GSA Schedule contractor – for $60.9 million. A review of the underlying qui tam complaint, filed by a former vice president of the contractor, reveals multiple alleged failures by Tremco Inc. and RPM International to comply with the basic – yet often very challenging – requirements of the contract: disclosure of commercial pricing and compliance with the Price Reduction Clause. Among a number of allegations, the complaint alleges that the roofing supplies and services contractor failed to disclose to GSA that it offered better pricing to its commercial customers than identified on its published price list. As a result, the complaint states that the government was disadvantaged by negotiating higher pricing than it would have, had it known about the contractor’s actual commercial pricing practices. The complaint also alleges that, during the course of performing the GSA Schedule contract, the contractor failed to provide price reductions to government customers when it provided discounted pricing to its commercial customers. Continue Reading GSA Schedule Contracting: Does Your Company Have Sufficient Internal Controls to Minimize Noncompliance Risks?
On Monday, DoD issued a final rule in a continuing effort to reduce the potentially inappropriate use of commercial item contracts. DFARS: Commercial Determination Approval, 77 Fed. Reg. 14,480, (Mar. 12, 2012) (to be codified at 48 C.F.R. pt. 212). The rule, most notably, modifies DFARS subpart 212.102 to require approval at the level above the contracting officer (CO) for many commercial item purchases exceeding $1 million.
The final rule responds to the Panel on Contracting Integrity’s 2009 Report to Congress recommendation for superior compliance with commercial item documentation requirements as found in PGI 212.102, a companion resource to the DFARs. Because of limited documentation, the Panel expressed concern regarding the CO’s establishment of “fair and reasonable” pricing for “of a type” and “offered for sale” commercial items. 2009 Report to Cong., Panel on Contracting Integrity, DoD Office of the Under Sec. of Def. (AT&L), at 20-1. The Panel did not discuss commercial services.
With Monday’s final rule, however, DoD may have impacted the future purchase of commercial services in an unintended way. Targeting “of a type” and “offered for sale” commercial items (as recommended by the Panel’s 2009 Report), DoD now requires higher-level approval of commercial item determinations that rely on subsections (1)(ii), (3), (4), or (6) of the commercial item definition at FAR 2.101. DFARS pt. 212.102(a)(i)(C). Subsection (6) concerns services “of a type offered and sold competitively in substantial quantities in the commercial marketing place” that have established prices for specific tasks or outcomes and are provided under standard commercial terms and conditions. The final rule also arguably reaches “ancillary” commercial services (such as installation, maintenance, repair, and training) through subsection (4), which identifies commercial items purchased in combinations. Most “ancillary” commercial services are likely to be purchased alongside another commercial item. Requiring higher-level approval for most commercial services over $1 million is an increased burden that may cause COs to avoid identifying service contracts as commercial item contracts.
Increased rigor regarding the appropriate use of commercial item contracts for “of a type” and “offered for sale” items is not surprising – the Panel on Contracting Integrity specifically recommended targeting such items. However, increased scrutiny over most commercial services does not appear to have been a clear target of the Panel or DoD, and results in a significant change to commercial item contracting procedures without opportunity for comment. Indeed, DoD appears to have failed to recognize the potential impact on commercial services as it proceeded directly to final rulemaking, stating “this rule does not have a significant effect beyond the internal operating procedures of DoD and does not have a significant cost or administrative impact on contractors or offerors.” Whether the effect of the final rule on commercial services proves significant will be seen.