On November 14, 2016, the Department of Defense (DoD) issued a class deviation to the Federal Acquisition Regulation (FAR) that prohibits contracting officers from awarding contracts to contractors that prohibit their employees from reporting waste, fraud, and abuse to federal officials. Specifically, when utilizing funds made available by the Continuing Appropriations Act, 2017 (Pub. L. 114-223), or any other Act that extends to FY 2017 funds, contracting officers must include two new Defense FAR Supplement (DFARS) clauses in all solicitations, including solicitations for the acquisition of commercial items:

  • 252.203-7994, Prohibition on Contracting with Entities that Require Certain Internal Confidentiality Agreements—Representation (DEVIATION 2017-O0001) (NOV 2016), which will require offerors, in order to be eligible for awards, to represent, by submission of their offers, that they do not require employees or subcontractors to sign or comply with such internal confidentiality agreements; and
  • 252.203-7995, Prohibition on Contracting with Entities that Require Certain Internal Confidentiality Agreements (DEVIATION 2017-O0001) (NOV 2016), which notifies the contractor of the prohibition on the use of funds for the contract, if the contractor is in noncompliance with the requirements of the clause. The clause also requires that contractors notify employees that any such agreements in pre-existing confidentiality agreements are no longer in effect.

Furthermore, the DoD will seek to modify existing contracts awarded on or after October 1, 2016, to the maximum extent practicable, to include DFARS 252.203-7995.

Background

This class deviation seeks to implement section 743 of Division E, Title VII, of the Consolidated and Further Continuing Appropriations Act, 2015 (Pub. L. 113-235) and successor provisions in subsequent appropriations acts (and as extended in continuing resolutions). Section 743 prohibits the use of funds appropriated or otherwise made available by Division E or any other Act for a contract, grant, or cooperative agreement with an entity that requires employees or subcontractors of such entity seeking to report waste, fraud, or abuse to sign internal confidentiality agreements or statements prohibiting or otherwise restricting such employees or subcontractors from lawfully reporting such waste, fraud, or abuse to a designated investigative or law enforcement representative of a federal department or agency authorized to receive such information.

On January 22, 2016, the FAR Council issued a proposed rule to implement Section 743 in the FAR. As a result, DoD's class deviation is expected to remain in place until the FAR's proposed rule is finalized.

Implications

While there is no question that a good compliance program encourages employees to report concerns internally so that the Company can review and determine the validity and appropriate response to such concerns, the DoD is the first to implement the government's view that employees and subcontractors cannot be prohibited from raising their concerns outside the organization with federal officials.

The clause may be particularly problematic for contractors that face False Claims Act liability through the implied certification theory. Plaintiffs' lawyers may seek to use a nondisclosure contract that is now prohibited to prove intent in that it could demonstrate 1) a contractor's desire to hide noncompliance issues from the government and 2) the contractor's understanding that the issue would be important to the contracting officer. The former could also call into question the integrity and present responsibility of the contractor, potentially leading to additional scrutiny from suspension and debarment officials.

In response to this:

  • Contractors (those that service the DoD or not, given that a similar rule under the FAR is likely) should examine their employment and confidentiality agreements, as well as employee handbooks, to ensure such restrictions are not in place.
  • If any such provisions exist, the contractor is not only required to change its policies, but also is obligated to notify employees that such restrictions are no longer in effect. The communication must take into account the most appropriate type of messaging for a given class of workers. For example, contractors must communicate these changes to workers who do not routinely work with computers beyond merely sending out an email or placing a notice on an internal website.
  • As part of this effort, contractors may want to emphasize all reporting options for employees, including reporting to the federal government, as well as reporting any internal concerns that they might have. If multiple options are not available, contractors should consider creating multiple and even anonymous mechanisms for raising concerns, and should publicize the procedures the contractor will use for addressing raised concerns.

For more information regarding the DFARS Class Deviation, as well as the proposed rule under the FAR, please feel free to contact either of the authors of this article.