Please join us for a webinar on Monday, September 20 at 2 pm ET for a discussion of the new rules requiring many contractors to report information about executive compensation and awards to subcontractors.

During this webinar, we will cover many topics, including:

  • Which companies must report executive compensation information?
  • How is executive compensation calculated?
  • How do these rules apply to publicly traded companies?
  • How does the CCR form work?
  • How should companies collect information from subcontractors?
  • What companies are considered subcontractors?
  • What if a subcontractor refuses to provide the information or the information is subject to a confidentiality agreement?
  • How do companies input the information in FSRS?
  • What will be done with the information?
  • Who will have access to the information?
  • What risks will companies face, even if they comply with this rule?

 

It should be an interesting discussion, and we hope you can join us.

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By now, most government contractors are (or most certainly should be) aware of the Federal Acquisition Regulation (“FAR”) provisions governing organizational conflicts of interest. While OCIs have been a hot issue for some time in the federal procurement world, OCIs are becoming an increasing risk area in the state procurement arena as well.   

By way of background, pursuant to the FAR, an “OCI arises when, because of other relationships or circumstances, a contractor may be unable, or potentially unable, to render impartial advice or assistance to the government, the contractor’s objectivity in performing the contract work is or might be impaired, and/or the contractor would have an unfair competitive advantage.” FAR 2.101. There are three general categories of OCIs: biased ground rules; impaired objectivity; and, unequal access to information. If not adequately mitigated or, when necessary, avoided, an actual or potential OCI can result in a vendor’s disqualification.      

Many contractors have been surprised to learn that a growing number of states have adopted OCI rules that follow these FAR principles. Some states, such as Maryland, Virginia, Minnesota, and Illinois have codified OCI rules in their respective state administrative or procurement codes. In other states OCI rules have been adopted at the agency-level. For instance the California, Tennessee and Washington Departments of Transportation have adopted OCI rules. Some states, such as California, have also adopted OCI rules via standard state contract provisions. 

Even where there is no specific state OCI rule or standard contract clause,  state contractors are not necessarily off the OCI hook. For instance, where federal grant money is used at the state level, such as in healthcare and education procurements, federal regulations sometimes require that the state grantee consider OCI issues before making award.   Moreover, many state procurement codes have rules that mirror the general federal procurement requirements regarding competition and fair and equitable treatment. Thus, for instance, a disappointed bidder could argue in the context of a post-award state protest that an awardee with an unequal access OCI has an unfair competitive advantage that runs afoul of the general state requirements for competition. 

In short, OCIs are not simply a federal procurement matter. State contractors must also beware.     

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We have previously provided information about the interim FAR Rule implementing the Federal Funding Accountability Act of 2006, as amended by the Government Funding Transparency Act of 2008. The Rule, which is already in effect, requires many government contractors to report information about their executives’ compensation, their first-tier subcontractors’ executive compensation, and information about their first-tier subcontract awards. Since the Rule was published on July 8, 2010, government contractors have wrestled with difficult questions of interpretation and implementation issues. 

The comment period closed on September 7, 2010. Comments (pdf.) submitted by the Council of Defense and Space Industry Associations highlight some of the thorniest questions. Issues include:

1) Does the Rule compromise national security because of mandatory disclosure of information about products and services supplied to the US government?

2) Does the Rule cause competitive harm due to disclosure of subcontractor name and pricing information?

3) How should the executive compensation portion of this Rule be applied to publicly traded companies that have hundreds of DUNS numbers and CCR entries?

It will be interesting to see how the FAR Council addresses these – and other – questions that government contractors are raising.

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In MCR Federal, LLC, B-401954.2 (Aug. 17, 2010), GAO denied protester’s challenge to the agency’s decision, in the context of taking corrective action, to waive organizational conflicts of interest for two offerors. The agency – CIA – concluded that executing a waiver was in the government’s best interest, because the pool of qualified contractors was so small that preclusion of an offeror (due to OCIs) would limit competition.

In denying the protest, GAO noted that “[w]here a procurement decision – such as whether an OCI should be waived – is committed by statute or regulation to the discretion of agency officials, our Office will not make an independent determination of the matter.” GAO found that the agency complied with FAR 9.503, including approval by the agency head’s designee and a written determination setting forth (i) the extent of the conflict and (ii) explanation for why application of the OCI rules would not be in the government’s interests in the particular procurement.

As discussed in my blog post in June, the Department of Justice intervened in a False Claims Act case filed by a whistleblower against Oracle which alleged that the company had failed to accurately disclose its commercial pricing practices to the government in association with its GSA Schedule contract. DOJ has now filed its complaint (.pdf) in this case.

The complaint largely tracks the allegations in the complaint filed by the whistleblower, who is a former Oracle employee. For example, DOJ’s complaint alleges that Oracle provided false, incomplete, and inaccurate information to the government during its negotiation of the Schedule contract. Not only does this allegation assert that Oracle’s actual discounting practices to its commercial customers were not fully or accurately reflected in its disclosures to the government, but also DOJ asserts that Oracle’s actual commercial pricing practices did not distinguish between different classes of commercial customers, even though the company’s disclosures to the government had included one set of discounts for “national accounts” customers and a different set for “commercial end users.”

The complaint also alleges that the company actively took steps to ensure that its commercial sales to its basis of award customers did not trigger the Price Reductions Clause by means such as increasing the order size to exceed the contract’s maximum order threshold, arranging for the sale through a reseller rather than directly from Oracle, or changing the terms of the software license sold to the commercial customer so that it differed from the terms of the licenses on the GSA Schedule contract.  It will be interesting to watch the development of this allegation in particular, because, typically, Schedule contractors can legitimately distinguish certain of its commercial sales to its basis of award customers from those sales that trigger the Price Reductions Clause.

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On July 8 the Department of Defense Standards of Conduct Office (SOCO) issued an update to the Encyclopedia of Ethical Failures (EEF), its listing of violations of federal ethics law by government and contractor personnel. The encyclopedia, which is organized by type of violations, including conflicts of interest, misuse of Government equipment, violations of post-employment restrictions, and travel, is a valuable resource for contractors’ ethics/compliance officers as it provides insight into the types of violations on which DoD is currently focused. Further, the violations can serve as a reference for employee training and written policies and procedures for companies that sell to the government.

Further, the update announced that the new 2010 Ethics Counselor’s Deskbook is available on the SOCO website. The Deskbook includes outlines and instructor presentations for all subjects covered at the annual Ethics Counselor’s Course held at the Army JAG School in Charlottesville, VA, as well as valuable reference material. Like the EEF, the Deskbook is a valuable reference tool for contractors’ ethics/compliance officers. In other words, if government ethics attorneys think a topic is important, chances are that government contractors should be paying attention.

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On June 17, 2010, the Federal Circuit majority ruled in M. Maropakis Carpentry, Inc. v. U.S. that it had no jurisdiction over the contractor’s defense, based on excusable delay, to the Navy’s liquidated damages claim for late completion, because the contractor had not filed a fully compliant “claim” under the Contract Disputes Act “CDA” (41 U.S.C. §§ 601-613.) Contractors have thus been warned. They should consider carefully all anticipated defenses (and those already asserted?) to government claims (e.g., breach or other government actions that might excuse a default termination) to determine whether they must be recast, formalized, and properly submitted under CDA procedures — with attendant cost and, likely, delay in dispute resolution.

In Maropakis, the contractor failed to complete a Navy facility renovation project in accordance with the contract schedule and alleged that the government caused much of the delay. During more than two years of correspondence, the Navy announced its intention to collect liquidated damages under the terms of the contract. The contractor initially filed a complaint for, among other things, time extensions to compensate for alleged Navy delays on the project, and the Navy counterclaimed for liquidated damages. The Federal Circuit affirmed a Court of Federal Claims decision that the plaintiff-contractor could not be heard on the government’s ensuing counterclaim for liquidated damages for breach of the contract schedule, because the Court lacked jurisdiction until the contractor met CDA requirements for properly drafting and submitting a claim to the contracting officer: i.e. clear statement of basis for claim, request for CO final decision, certification.

The Maropakis majority relied on Sun Eagle Corp. v. United States, 23 Cl. Ct. 465 (1991) to characterize the plaintiff’s position as a “claim for contract modification” instead of a “defense” against a government claim for liquidated damages. While the Maropakis court declined to provide much detail on its conclusion that the plaintiff was “claiming” and not “defending,” the Sun Eagle case sheds some light possible ways to make the distinction. The Sun Eagle court stated that contractors could likely defend themselves against government liquidated damages claims without having to first submit for CDA-complaint claims, so long as the contractor did not claim for itself the liquidated damages sum assessed or any interest thereon. 23 Cl. Ct. at 482. The Maropakis plaintiff may have been more readily viewed as a “claimant” than a “defender,” considering the claim for rescission of liquidated damages and interest in its initial complaint.

The Maropakis majority also relied, however, on Elgin Builders, Inc. v. United States, 10 Cl. Ct. 40 (1986), where the contractor was permitted to defend against a government liquidated damages claim without filing a CDA-complaint claim of its own, but only to the extent of denying any delay in completion: “However, if plaintiff intends — in connection with its contest of the assessment — to raise any issue of relief to which it might be entitled, such as the contractor’s claim of entitlement to time extensions, such claims must first be presented to the CO for his decision and this court will not consider such claims until that has been accomplished.” Id. at 44. In short, Maropakis apparently confirms strict procedural requirements on contractor defenses that could be asserted as claims, probably even if not advanced as claims for money.

The Maropakis opinion was delivered over a spirited dissent, which steadfastly refused to view a contractor’s objection to a government claim for liquidated damages as a “claim” subject to a jurisdictional bar. And, more basically, the dissent expressed grave concern—even quoting President Lincoln in the process—that the majority’s decision to grant the government’s motion for summary judgment on its liquidated damages claim, denied the contractor the basic right to defend itself.

On June 16, 2010, the media reported that a False Claims Act case had been filed by a whistleblower against Oracle Corporation alleging that the company had failed to disclose deep discounts given to the most favored commercial customers. The Department of Justice has intervened and unsealed the relator’s complaint. The Government has not yet filed its complaint but is expected to do so this summer.

GSA Schedule contractors are clearly in the hot seat for fraud allegations: Recall the NetApp settlement of $128 million reached a year ago that was based on a relator’s allegation of failure to comply with the Price Reductions Clause. Then there were the Folliard and United States ex rel. Crennen v. Dell Marketing LP (__ F. Supp. 2d. __, 2010 WL 1713633 (D. Mass. Apr. 27, 2010)) decisions issued a few months ago, both alleging that sales of products purportedly non-compliant with the Trade Agreements Act resulted in the submission of false claims by Schedule contractors. Just last month, the EMC settlement was announced, resolving allegations of false claims and improper fee payments to encourage the sale of EMC’s products off its Schedule contract. Of course, Oracle settled a prior False Claims Act case in 2006 that alleged that commercial discounts had not been properly disclosed to GSA on PeopleSoft’s (later acquired by Oracle) Schedule contract. 

This new Oracle complaint again reminds us of the risk of fraud allegations when performing a GSA Schedule contract.  Particularly because many GSA Schedule contract holders have little to no other federal government business, they apply for a Schedule contract with little consideration of the unique requirments with which they will be expected to comply — particularly the disclosure and pricing requirements.  These fraud cases underscore the importance not only of disclosing the required commerical pricing information and negotiating a workable Most Favored Customer for Schedule performance, but also of having workable internal policies and procedures that allow the contractor to comply with the Schedule contract’s requirements without compromising its commercial business pursuits.  Does your company have the policies and procedures it needs to ensure compliance with Schedule requirements?   

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Contractors, regardless of size and no matter how “indispensable” they think they are to their Government customers, should be prepared for a possible up tick in suspension and debarment (S/D) activity in the next year. Congress has taken an increased interest in S/D, requiring in the FY 2009 DoD Authorization Act that the Interagency Committee on Debarment and Suspension submit an annual report to Congress on each agency’s “activities and accomplishments in the Government wide debarment system.” And the House Committee on Oversight and Government Reform recently took three agencies to task for the slow pace and low number of S/D actions (the Department of Homeland Security has had only ten debarment cases in four years).

In addition, an attorney from the Army Procurement Fraud Branch stated publicly at a recent ABA conference that no company is “too big to fail,” echoing the sentiment of the Commission on Wartime Contracting during a hearing a few weeks ago. The Commission rejected a suggestion by Special Inspector General for Iraq Reconstruction that the Government’s dependence on a small number of large prime contractors in Iraq and Afghanistan is a legitimate consideration that might counsel against debarment in some cases for practical reasons. As Commissioner Dov Zackheim put it:

“Well, let me just point out that too-big-to-fail practically wrecked this economy of ours, and I think if we worry about too big to fail, particularly as there are more than one contractor always bidding, we worry about too big to fail, we’re going to fail anyway.”

The Commissioners made it abundantly clear that they wanted to see more suspensions and debarments all around, including for “willful bad performance.” And they want to see primes suspended or debarred for the malfeasance of their subs.

On May 25, 2010, the Justice Department announced an $87.5 million settlement with EMC  for alleged false claims associated with EMC’s GSA Schedule contract. The settlement comes out of a series of qui tam suits filed against IT companies and systems integration consultants by relators Norman Rille and Neal Roberts in the Eastern District of Arkansas in 2004. The Justice Department intervened in the cases.

While some of the allegations were unique to each defendant, the common thread throughout the cases was the allegation that the IT companies’ improperly made payments of “finders fees,” “influencer fees,” rebates, and the like to companies (referenced in the complaints as systems integration consultants or alliance partners) who made recommendations to the U.S. Government about which IT products and services to procure. The relators’ asserted that such payments were kickbacks that violated the Anti-Kickback Act, and also resulted in false claims being submitted to the Government.

The recent EMC settlement serves as a reminder to government contractors, particularly those in the IT community, that payments to third parties for influencing Government purchases of one’s products or services – particularly when such payments are not disclosed to the Government – are risky at best. The settlement is interesting, though, for a second reason. It contains a clause  addressing EMC’s solvency that the Justice Department has not, to date, typically included in its settlement agreements: 

“EMC warrants that it has reviewed its financial situation and that it currently is solvent . . . , and shall remain solvent following payment to the United States of the Settlement Amount. . . .”

Is the Government worried that EMC’s payment of the settlement amount could prejudice other creditors under the bankruptcy laws? Is this clause going to be a standard clause in settlement agreements with the U.S. Government going forward? Will it be effective in precluding creditors from challenging settlements with the Government?