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On May 16, 2013, the Department of Defense (“DoD”) published long awaited proposed regulations regarding efforts contractors must take to prevent the entry of counterfeit electronics into the DoD supply chain. As previously discussed on this blog, Section 818 of the National Defense Authorization Act for FY2012 required DoD to revise its acquisition regulations to address the detection and avoidance of counterfeit parts. This blog discussed the scope of one interim measure, DoD Instruction No. 4140.67, earlier this month.

So what’s new? Thursday’s proposed regulations represent the self-described “partial implementation” of Section 818. Nevertheless, the revised regulations purport to accomplish several key changes to the Defense Acquisition Regulation Supplement in response to Section 818.

Definitions. First, the regulations propose several new definitions, including those of “counterfeit part,” “electronic part,” “legally authorized source,” and “suspect counterfeit part.”

Applicability. These proposed regulations extend only to contracts that are subject to the Cost Accounting Standards.

Contractors’ counterfeit electronic part avoidance and detection systems. The new proposed regulations (and corresponding DFARS clauses) outline the various required elements of an acceptable counterfeit electronic part avoidance and detection system. All such systems must, at a minimum, address the following items: the training of personnel; electronic part inspection and testing; processes to abolish counterfeit part proliferation; traceability of parts to suppliers; use and qualification of trusted suppliers; reporting and quarantining of counterfeit and suspect counterfeit electronic parts; methodologies to identify suspect counterfeit parts and to quickly determine if a suspect part is, in fact, counterfeit; the design, operation, and maintenance of systems to detect and avoid counterfeit and suspect counterfeit electronic parts; and the flow down of counterfeit detection and avoidance requirements to subcontractors. In the event a contractor fails to maintain an adequate purchasing system (which includes the detection and avoidance system requirements outlined above if applicable), the contracting officer is entitled to withhold payments, assuming the rule is implemented as proposed.

Unallowability of costs. Finally, the proposed regulations explain that contractors cannot recover the costs incurred for any rework or corrective action resulting from the inclusion of counterfeit electronic parts or suspect counterfeit electronic parts. Although a safe harbor exclusion exists, that exclusion is narrow, and limited to situations where the contractor has a DoD approved system to detect and avoid counterfeit and suspect counterfeit electronic parts, the counterfeit or suspect counterfeit electronic parts are Government-furnished property, and the contractor provides timely notice to the Government. Given the narrow scope of this exception, this so-called safe harbor is likely to raise some questions.

This blog will continue to discuss these new regulations and their impact on contractors in the coming weeks.

When pursuing government work, contractors frequently team together and combine resources in order to create the most appealing proposal. These arrangements are often memorialized in teaming agreements that set forth terms, including but not limited to, the purpose of the agreement, the relationship between the parties (e.g., prime versus subcontractor), and other general provisions. Importantly, a teaming agreement will often include a provision stating that the parties will execute a subcontract or other document, pending the successful outcome of the proposal. According to a recent decision decided under Virginia law, however, such a teaming agreement may not be enforceable, and a would-be subcontractor could be left without recourse.

In Cyberlock Consulting, Inc. v. Information Experts, Inc., the United States District Court for the Eastern District of Virginia assessed the second of two teaming agreements entered into by the same two parties. The teaming agreement provided that Cyberlock would perform 49 percent of the work awarded to Information Experts in connection with a potential Office of Personnel Management (OPM) contract. In fact, the agreement explicitly provided “that ‘[i]n the event [Information Experts] is awarded a prime contract for the Program, [Information Experts] agrees to execute a subcontracting agreement to provide [Cyberlock] 49 percent of the prime contract for the work anticipated to be performed by Subcontractor.” Despite this language, the court held that the teaming agreement was an “unenforceable agreement to agree” under Virginia law because, when “read as a whole,” the language “was not meant to provide a binding obligation but rather to set forth a contractual objective and agreed framework” for future negotiation. As justification for this conclusion, the court highlighted other terms in the agreement which suggested that: (1) that the award of any work would require the negotiation and execution of a future subcontract; (2) award of any work was subject to the success of such future negotiations; (3) any future subcontract was subject to OPM’s approval; and (4) allocation of work in a future subcontract “could change as it merely was based on the work anticipated to be performed by Cyberlock as then-presently understood by the parties.” As part of this assessment, the court also explicitly corrected one of its prior rulings in the litigation that “failed to take account” of the agreement’s integration clause, and used extrinsic evidence to find that Cyberlock and Information Experts meant the agreement to be more than an “agreement to agree.” In light of this ruling, companies considering a teaming agreement should look carefully at choice of law, dispute resolution, and integration provisions.

At 1:00 p.m. (Eastern) on October 18, 2012, Crowell & Moring attorneys Cathy Kunz, Richard Arnholt and Tiffany Wynn will conduct  a webinar on behalf of L2 Federal Resources entitled “Business Ethics  in Government Contracting: Legal Requirements & Best Practices for Compliance.” This 90-minute webinar will provide an overview of the requirements in FAR 52.203-13 for a code of business ethics, business ethics awareness and compliance program and internal control system. Other topics we will cover are the key requirements of the mandatory disclosure rule and the consequences of failing to comply with all aspects of compliance and disclosure, as well as provide an in-depth review of best practices.

Further details and registration information are available at http://l2federalresources.com/2012/code-of-business-ethics/.

L2 Federal Resources requires a registration fee for its webinars.

On Wednesday, Congressman Bill Owens (D-NY) introduced the Small Business Growth and Federal Accountability Act of 2012 (H.R. 3779). The bill is designed to ensure that government agencies provide more work for small business concern by authorizing blanket preferences and providing for monetary sanctions for the failure to meet annual goals. Owens is the bill’s lone sponsor. 

A congressionally mandated goal requires that federal government agencies award at least twenty-three percent of all prime contracts to small businesses annually and establishes additional goals for other categories of small business concerns, and each federal agency is allowed to set individual small business contracting goals in consultation with the Small Business Administration (SBA). As it stands, however, there are no existing penalties for agencies that do not meet their annual goals. 

Under H.R. 3779, this would change. The bill would authorize agencies to give “preference” to small business concerns when procuring goods or services to help reach each agency’s small business contracting goals. Although the term “preference” is not defined, arguably it is intended to include the application of status-based evaluation preferences in full and open competitions in addition to the issuance of small business set asides. The bill would also decrease an agency’s procurement budget by ten percent each year it failed to meet its annual goals. By rule the Appropriations Committee is responsible for rescissions of appropriations and unspent balances from federal agencies, and in a statement Owens called on the Committee to use any such lost funding towards paying down the national debt.

Several questions and implications of the bill are (1) how agencies will weigh cost savings from awarding contracts to large business versus any potential penalties for shortcomings on small business goals; (2) since the penalty is a one-size-fits-all approach, will agencies further decrease efforts at awarding small business contracts if they know they will not be able to achieve one of the applicable goals; and (3) will this lead to the imposition of similar monetary penalties for prime contractors who fail to meet their own annual small business subcontracting goals.